From Briefing.com: Tech investors have wrestled with whether to hold 'em or fold 'em each earnings season over the past year. Why, investors questioned, should I continue to risk my winnings? The answer was made simple by the calculus of a recovering global economy, favorable fiscal and monetary policy, investments in R&D and capital equipment, and reductions in headcount and overhead--which together point to expanding top and bottom lines and suggest a continuing run-up in share prices. This was the case following Q3 results. Companies posted strong sales growth, even stronger earnings growth, and investors gave a resounding thumbs up to holding them. As of Tuesday's close, the SOXX had risen over 21% and the Nasdaq Composite over 15% since September 30, 2003. With the run-up in share prices, the answer to the perennial buy or sell question has become increasingly difficult to answer, leaving investors divided. The unanimous decision today was to fold 'em.
Cisco Systems (CSCO 24.08 -2.33) led tech shares lower, falling 8.8%. The networking giant posted Q2 results ahead of expectations but gave a cautiously optimistic outlook. Investors sold on the news, not wanting to risk the 17% run-up in CSCO shares since the company's Q1 report. The selling spread through tech as the session wore on. By the closing bell, the Philadelphia Semiconductor Index (SOXX 493.35 -15.18) had fallen 2.99% with no advancers among the 18 company index. The Briefing.com Tech Index (BTI) dropped 2.6%. Decliners outnumbered advancers 5.2:1, with decliners losing 4.0% and advancers gaining 3.5%. The Nasdaq Composite (IXIC 2014.14 -52.07), held down by tech, gave up 2.52%. In contrast, the industrials and blue-chips held up a little better. The Dow (DJI 10470.74 -34.44) slipped 0.33% and the S&P (SPX 1126.52 -9.51) dipped 0.84%.
Even though CSCO's results point to solid execution, and management's comments suggest a spreading global economic recovery, we see valuation concerns continuing to weigh on tech shares near-term. Over the long-term, we remain modestly bullish on CSCO and tech but emphasize the need to be selective. We would take advantage of these sharp adjustments to improve portfolio quality. Please visit the Story Stocks page for the latest thinking on actionable investment ideas.
After the close, Cerner (CERN 38.45 -1.40), ESS Technologies (ESST 15.63 -0.26) and O2Micro Int'l (OIIM 19.60 -1.76) reported results ahead of expectations. Please refer to the Industry Briefs section of the Tech Stocks page for details.
Looking ahead to Thursday, Alcatel (ALA 15.47 -1.04) and Benchmark Electronics (BHE 32.30 -2.18) report before the open, and Electronic Data Systems (EDS 23.07 -0.27), Maxim Integrated Products (MXIM 48.69 -2.27) and Triquint Semiconductor (TQNT 8.01 -0.56) after the close.--Ping Yu, Briefing.com
6:31PM Wednesday After Hours prices levels vs. 4 pm ET: After the slaughtering in the tech sector - in which the Nasdaq tanked 2.5%, the market has settled some. Earnings releases have been mostly encouraging, with no huge warnings to scare investors off. However, buyers have not returned in full force as the S&P futures, at 1124, are 2 points below fair value, and the Nasdaq 100 futures, at 1465, are 1 point above fair value.
The below table lists tonight's most striking announcements, and the reasons behind the stock's resulting move.
After Hours Mover % Change Move Reason for Move
Boeing (BA) unch Bloomberg.com reports that the aerospace giant's $27.6 bln deal to lease/sell US Air Force refueling tankers will undergo at least 3 more months of scrutiny before the Air Force can proceed with a contract, according to a Pentagon official; Latest setback for company whose CEO resigned amid scandal in early Dec
Medtronic (MDT) -2% Medical device name warns for Q3 (Jan) revenues, Notes that sales are lower than the company expected during its mid-quarter call; Blames slower than projected market growth in the Cardiac Rhythm Management product lines; Briefing.com took a cautious stance on Medtronic in a Story Stock on Nov 13 citing its large size and (relatively speaking) slower pace of growth
Pixar Animation (00C0) +2% Computer animation studio blows past the Q4 (Jan) consensus EPS estimate by $0.17 in its most profitable quarter ever; Company continues to court distributors after ending talks with Disney for a future contract last Thursday; Says that its newest film, The Incredibles, should be released in November
Roxio Inc (ROXI) -13% Digital media software company reports a Q3 (Dec) loss of $0.92 - which is better than the Reuters Research estimate of ($0.97) - but traders still use the headline number as an excuse to reduce exposure; Roxio also announced a new university license deal with Napster
A number of comparable store sales have also been released ahead of the morning rush tomorrow. In our Looking Ahead column, we conjectured that the retailers would do very well during the month of January, and sure enough, the preliminary results have been encouraging. Tonight's most notable names have been summed up below, and Platinum subscribers of Briefing.com may visit the Same Store Sales Calendar for more detailed figures.
Retailer % Change Move January Same Store Sales Result
Aeropostale (ARO) +2% +17.7%; Beat the Briefing.com consensus estimate of 6.2%; Teen retailer also increases its Q4 (Jan) EPS forecast to $0.67-0.69 from $0.66 earlier
American Eagle (AEOS) +9% +0.9%; Topped the Briefing.com consensus of -5.9%; Retailer raised quarterly guidance for the first time in over 3 years; Now sees Q4 (Jan) $0.53-0.56 versus Street's consensus of $0.47; Briefing.com recently wrote about AEOS as a turnaround play in our Looking Ahead column
Hot Topic (HOTT) -6% +4.7%; Missed the Briefing.com consensus of +6.4%; One of the first times the apparel maker has missed estimates, and traders use the initial sign of weakness as an excuse to take profits from the stock's 100% run in the past year
In addition to the same store sales data and the usual outpouring of earnings, the market will take into account the weekly initial claims data and the preliminary Q4 productivity number tomorrow. The latter will be of particular significance given the Q4 GDP figure's miss of the consensus estimate, and thus traders should eye the 3.0% productivity consensus closely.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
4:58PM KLA-Tencor loses bid for $8.4 mln patent-infringement case (KLAC) 55.45 -1.14: Bloomberg.com reports that KLAC lost an infringement lawsuit of $8.4 mln in damages against ADE Corp (ADEX). A federal court in Delaware ruled that one of KLAC's patents was invalid.
4:56PM FEI Company earnings color (FEIC) 23.19 -1.10: -- Update -- Reuters Research is indicating that excluding items actual of a $0.11 is comparable to the $0.10 consensus... see 16:23 update for full earnings comment.
4:23PM FEI Company reports Q4 (FEIC) 23.19 -1.10: Reports Q4 (Dec) GAAP earnings of $0.10 per share, above the co's prior guidance of $0.04-$0.08, including amortization of purchased intangibles of $1.4 mln, or $0.03 per share. Note: it's not clear if this is comparable to Reuters Research consensus of $0.10; checking with Multex for an answer; revenues rose 14.7% year/year to $97.7 mln vs the $93.4 mln consensus.
4:08PM ESS Tech beats by $0.03, ex items; guides above Q1 consnesus (ESST) 15.63 -0.25: Reports Q4 (Dec) earnings of $0.23 per share, ex items, $0.03 better than the Reuters Research consensus of $0.20; revenues rose 74.3% year/year to $82.9 mln vs the $80.4 mln consensus. Co sees pro forma Q1 (Mar) EPS of $0.10-0.15 and revenues in the range of $68-76 mln, Reuters consensus is $0.10 and $71 mln, respectively.
4:06PM AXT Inc beats by $0.03, guides Q1 above consensus (AXTI) 3.90 -0.08: Reports Q4 (Dec) loss of $0.09 per share, $0.03 better than the Reuters Research consensus of ($0.12); revenues rose 7.4% year/year to $9.1 mln vs the $8.8 mln consensus. Co also guides Q1, sees loss of $0.08-0.09, vs the R.R. consensus of ($0.11), and revenues of $9.7-10.3 mln, vs the estimate of $8.65 mln.
4:04PM O2Micro beats by $0.02 (OIIM) 19.60 -1.76: Reports Q4 (Dec) earnings of $0.13 per share, $0.02 better than the Reuters Research consensus of $0.11; revenues rose 37.0% year/year to $25.2 mln vs the $24.8 mln consensus.
11:40AM 50 Day-Alert -- TriQuint Semi (TQNT) 8.09 -0.48: -- Technical -- Slips back to support at its 50 day exp mov avg at 8.04 (session low 8.06). The slide last week (hit 8.01) held near this average.
11:19AM IDTI: Amtech remains cautious about co's 22% revenue exposure to Cisco 16.83 -0.46:
QLogic (QLGC) 43.57 -0.02 : ThinkEquity upgraded QLogic (QLGC) to Overweight from Equal-Weight based on valuation, as well as their belief that the HBA sector continues to be largely unaffected by pricing pressures in the switch mkt owing to a lack of any large new competitors in the mkt and a relatively small percentage of the bill of materials; although the March qtr will likely show the lingering hangover effects associated with the hard drive controller biz, firm believes that continued strong performance in HBA's, improving switch sales, and a mid-year turnaround in HDC business will contribute to growth re-acceleration. Target is $50.
United Micro (UMC) 5.09 -0.19 : Before the open, reported Q4 (Dec) earnings of $0.07 per share, $0.02 better than the Reuters Research consensus of $0.05; revenues rose 32.5% year/year to $698.0 mln vs the $708.1 mln consensus.
ATMI (ATMI) 25.86 +0.24 : Before the open, reported Q4 (Dec) earnings from continuing operations of $0.11 per share, excluding $0.03 charge and $0.10 gain, $0.09 better than the Reuters Research consensus of $0.02; revenues from continuing operations rose 40.6% year/year to $52.4 mln, not comparable to $69.3 mln consensus.
ON Semiconductor (ONNN) 6.98 +0.00 : Priced 47 mln share offering at $6.98.
Ultratech Stepper earnings color (UTEK) 27.28 -2.40 : Before the open, reported Q4 (Dec) earnings of $0.13 per share, $0.03 better than the Reuters Research consensus of $0.10; revenues rose 29.5% year/year to $26.8 mln vs the $27.4 mln consensus. Although not mentioned in the text of the earnings press release, the company's income statement includes a tax benefit of $491,000 and a restructuring charge of $614,000 that may skew comparability to consensus. In touch with Reuters Research to confirm actual. Reuters Research indicated that, excluding a $0.03 gain, company earned $0.10 per share, in line with Reuters Research consensus of $0.10.
3:53PM PeopleSoft (PSFT) 22.73 +0.84: Before the market open, Oracle (ORCL 13.29 -0.62) raised its cash bid for PeopleSoft to $26. PeopleSoft's management has requested that shareholders not take action on the revised bid until the PSFT board reviews the offer.
As noted in Story Stocks (October 6, 2003), the old Oracle offer, on a multiples basis, understates Peoplesoft's value by at least 50%, assuming that Peoplesoft management continues to take costs out of the combined Peoplesoft / J.D. Edwards to achieve margin levels comparable to Oracle. However, PSFT's Q4 results revealed that the operating and financial synergies of the PeopleSoft / J.D. Edwards combination have yet to be realized (Story Stocks, January 30, 2004).
ORCL smartly waited until PSFT posted Q4 results before making its next move. As a result, the revised offer more closely reflects what we think is a fair price for PSFT on a multiples basis, without ORCL having to pay full price. We continue to think the ORCL offer understates PSFT's value, but the pressure is on PSFT management to convince the PSFT board that momentum remains on the side of Peoplesoft to take costs out of the company and bring to bear the force of the combined Peoplesoft / J.D. Edwards.--Ping Yu, Briefing.com
3:24PM United Micro Elec (UMC) 5.11 -0.17: United Micro Electronics reported Q4 results before the open. The global semiconductor foundry posted EPS of $0.06 on revenue of $698MM (+38.5% Y/Y; +35.3% Y/Y in NTD) vs. Reuters Research consensus at $0.05 on $708.15MM. Revenue from advanced technology wafers (<=0.18µm) increased 10 pts Y/Y to 46% of total sales, driven by improving demand across geographies and applications, particularly communications. Blended ASP (average selling price) was flat Q/Q but management expects blended ASP to increase in the low single digit percent in Q1. This contrasts against Taiwan Semiconductor Mfrg (TSM 10.48 -0.22) which saw ASPs decline 5.5% Q/Q in Q4 and guided for a deceleration in the rate of price declines in Q1.
Gross margin improved 1335 bps Y/Y to 28.1% on improved manufacturing efficiencies. Capacity utilization rose Y/Y from 64% to 96% on a 0.1% decline in capacity to 672kpcs of 8-inch equivalent wafers. Wafers shipped increased 48.4% Y/Y to 644kpcs.
Operating margin improved 1568 bps Y/Y to 17.6% as management held back total operating expense despite a 87.5% Y/Y increase in sales and marketing expense.
Management guided for Q1 wafer shipments to be similar to Q4 and utilization to be approximately 100%, including annual fab maintenance. Gross margin is expected to increase Q/Q due to the higher utilization.
Full year capital expenditures are expected to rise 186.9% Y/Y to $2.120B for 2004, centered around leading edge 300mm manufacturing facilities. The company plans to triple 300mm manufacturing capacity to 30kpcs of 12-inch wafers per month, with planned capacity, including UMCi, to increase 16% Y/Y. Total capacity is forecast to increase 1.6% Y/Y to 679kpcs in Q1 and 24.9% Y/Y to 839kpcs for 2004. Over 50% of total capacity will be capable of manufacturing chips using 0.18µm and smaller geometries.
UMC shares are pricing in, based on our inverted DCF / EVA model, sustained mid 20% growth, assuming steady Y/Y improvement to 40% operating margin by 2007. We think UMC is positioned to deliver on these expectations given that 1) the expected revenue growth rate is consistent with industry forecasts for a compound annual growth rate for foundries in the mid 20% to 30% range, and 2) UMC should realize substantial economies and yield improvements from its investments in leading edge technologies. However, we note that at that point, shares are modestly under-valued to fairly valued. As a result, we would wait for a 15-20% pull-back before initiating a new position.
UMC's results, outlook and capital expenditures forecast, like that of TSM's, suggests that the demand fundamentals underpinning semiconductor device firms remains intact and provides some actionable data points for select semiconductor device, communications and semiconductor capital equipment manufacturers. We would take advantage of today's weakness to build up positions in:
Semiconductor device firms: Analog Devices (ADI 45.94 -0.98), Intel (INTC 30.21 -1.15) and Intersil (ISIL 24.53 -1.13);
Communications equipment manufacturers: Avaya (AV 17.37 -0.34), SpectraLink (SLNK 17.99 -0.52) and UTStarcom (UTSI 34.16 +0.02); and
Semiconductor capital equipment company ASM International (ASMI 23.52 -2.04).--Ping Yu, Briefing.com
11:34AM Cisco Systems (CSCO) 24.66 -1.75: Cisco Systems published Q2 results after the close Tuesday. EPS came in at $0.18 on revenue of $5.398B (+14.5% Y/Y) vs. Reuters Research consensus at $0.17 on $5.283B. Book-to-bill was below 1.0 with Y/Y product bookings growth approximately equal to Y/Y product revenue growth.
Guided for Q3 revenue of $5.452-5.560B (+1-3% Q/Q; +18-20% Y/Y) vs. consensus at $5.373B. Gross margin is expected to come in at 67-69%.
Product revenue increased 16.9% Y/Y to $4.550B (84% of sales). Service revenue increased 3.2% Y/Y to $0.848B (16% of sales). CSCO saw improving but lumpy demand across product segments and geographies as enterprise customers, although increasingly confident with regard to the global economy, maintain a tight rein on capital spending. Revenue by Product Segment:
Switches (39% of sales) revenue increased by the mid single digit Q/Q;
Routers (26% of sales) revenue increased in the low single digit Q/Q and bookings increased 50% Y/Y;
Advanced Technology (15% of sales) showed solid progress and across the board improvement in market share gains:
Home Networking (Linksys) revenue increased 39% Q/Q to $165MM; market share increased 10 pts Y/Y to 57%; Q2 is seasonally the strongest quarter;
IP Telephony revenue declined 10% Q/Q but bookings increased 25% Q/Q;
Optical Networking revenue increased over 10% Q/Q;
Security revenue increased in the high single digit Q/Q; $1B annual run-rate;
Storage Networking revenue increased 120% Q/Q to $40MM; total customers increased 80% Q/Q to 540;
Wireless revenue increased in the upper single digit Q/Q (50% Y/Y) while bookings increased 70% Y/Y;
Other (4% of sales).
Revenue by Geographic Segment:
U.S. sales (45% of bookings) increased in the high single digit Q/Q;
EMEA sales (30% of bookings) increased by double digits Q/Q;
Asia-Pacific (12% of bookings) had solid balance with India increasing over 30% Q/Q and similar results in Korea; China experienced normal seasonality after a strong Q1;
Japan (7% of bookings) increased over 20% Q/Q; and
Americas Int'l (6% of bookings) showed good balance; Canada increased in the high single digit Q/Q; Mexico and Central America increased in the mid single digit Q/Q.
Gross margin declined 187 bps Y/Y to 68.5%. Product gross margin declined 190 bps Y/Y to 68.7%. Service gross margin declined 170 bps Y/Y to 67.6%. Linksys had a (0.3%) impact on gross margin. By our calculations, Linksys gross margin improved approximately 2500 bps Q/Q to 59.4%, significantly ahead of our expectations as noted in the Q1 review (Story Stocks, November 11, 2003), when we stated that we think CSCO can achieve as much as a 2000 bps improvement in Linksys gross margin as sales ramp above the $250MM per quarter mark. This should help ease some of the concerns over gross margin pressure. Ultimately, as we stated in the Q1 review, the focus should be on the operating level and whether CSCO can realize economies on incremental sales from Linksys. Q2 results demonstrate CSCO is realizing economies on incremental sales from Linksys.
Operating margin improved 184 bps Y/Y to 28.7% as revenue grew at a faster pace than expense. Operating expense as a percent of sales improved by 371 bps Y/Y to 39.8%. Management's goal is to improve operating expense as a percent of sales to the 35% level, bringing CSCO's operating cost structure approximately 500 bps below competitors.
Management is executing well. During the quarter, the company introduced a number of products into the consumer, service provider, and SOHO (Small Office/Home Office) markets, and acquired Latitude Communications, a provider of enterprise conferencing solutions to augment its IP Telephony products. These new market opportunities substantially exceed $50B and form the base of a new foundation for growth. As we noted in the Q1 review, we think CSCO will be able to deliver at least low- to mid-teens growth and modest operating margin expansion in a mild recovery but that there is limited upside until Cisco demonstrates high-teens to low 20% growth. CSCO is delivering on these drivers but, as of Tuesday's close, shares had risen over 17% since November 11, 2003, meaning that there is limited upside from current level until Cisco delivers low to mid 20% growth. We think CSCO is positioned to deliver on this level of growth and modest operating margin expansion as the global economy continues on a path to recovery, given the company's strong product portfolio, price/performance leadership and competitive cost structure but shares are likely to remain range-bound near-term. We would accumulate on today's weakness but prefer entry in the low $20 range.--Ping Yu, Briefing.com
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