Expert Advice — In Defense of SiRF
Apr 1, 2008 By:Stephen Colwell - GPS World
On February 11, GPS World’s Navigate! e-news daily reported that a Pennsylvania law firm made SiRF Technology the object of a class-action lawsuit following the company’s February 5 fourth-quarter earnings report. On February 14, we reported a second action. More than a dozen firms have now filed against SiRF. See The Business section for details.
Should investors in high-tech stocks feel cheated of their profits because the share price had the gall to fall for once? Did they ever learn that risk is inherent in the market, and indeed in business generally?
The number of class-action suits targeting SiRF reminds me of Atlanta burning in Gone with the Wind. Why torch the city? Why not leave it standing and do some clean-up?
I find it interesting that no such suits have been filed against Garmin, whose stock price rose to a high of $125 per share in November and recently hit a low of $52 per share in February. Would it seem reasonable to assume that SiRF, who has supplied Garmin with the venerable SiRFstar III chipset, might also suffer when a major customer goes south so quickly?
Regardless of the outcome, the issues facing SiRF primarily revolve around its acquisition of Centrality Communications and matters related to the disclosure of material events.
Industry analysts now take the hindsight view that the Centrality purchase was a bad move, but comments were pretty positive when it took place. It made sense. Acquire new technological capabilities and expand your market share to the low end, while at the same time you control the higher end of the food chain. These market experts were also bullish on SiRF not only expanding its customer base but holding off competition that had been heating up for some time. The acquisition complimented SiRF’s core capabilities.
Disclosure. I have never consulted with SiRF, and the last GPS company stock of any kind that I owned, I sold in 1989. You cannot be a consultant in the business when you own stock. In fact I do not own any stock at all. It has been tempting, but not at the price of forgoing impartiality.
Reading the filings, we find a range of accusations against the company, allegations of one flavor or another which the plaintiffs claim contributed to the poor financial results disclosed in the latest analyst conference call and fourth-quarter (Q4) results. Most of charges are boilerplate accusations found in almost all class-action suits of the same nature, and my comments reflect a personal opinion, which as you read will identify my disdain for these types of witch hunts.
Herein follows an abridged and compiled version based on a review of the various press releases of the law firms that have filed suit. My response follows under each of the allegations, which appear in bold italics.
SiRF failed to disclose adverse facts about the company’s financial well-being, business relationships, and prospects.
A public company, SiRF publishes its financials for the world to see. As to business relationships, SiRF has issued press releases for any major new order it has received, which have been quite a few over the years. What company would ever issue a statement saying “we just lost a customer?” It’s up to the educated investors to follow the market, watch the competition, and call the investor relations person to inquire what’s going on if they feel something adverse underway.
Prospects, on the other hand, are a closely guarded secret and should be held confidential to those employees responsible for securing them as customers. Leaks of potential prospects often hurt the company’s ability to close the deal and alert competitors to try to steal the business away. I learned a long time ago, a deal is not done until the money hits your account.
SiRF lacked sufficient orders to fulfill sales targets set by the company.
Anyone who follows the market for GPS components understands the risk associated with GPS product manufacturers changing order volumes, delaying shipments based on a revised build volume, or changes in their own competitive landscape. Competition has hit SiRF very rapidly — like the perfect storm. Remember Broadcom buying Global Locate, NXP acquiring GloNav, or Atheros buying U-nav? Not to mention Texas Instruments moving into the space as well. All within a year. This creates confusion in the forecast process until you see how it will affect market share. SiRF had a bullseye painted on its back; it had demonstrated the size and potential of the market, and everyone wanted a piece of its action.
Centrality Communications, Inc. and its system-on-chip product line would result in overall lower margins and would affect SiRF’s current product line, which would lead to lower gross margins for existing SiRF products.
As stated above, most knowledgeable analysts believed this was a good move at the time. I think what may have happened is that SiRF, perhaps wrongly, believed its high-end product would continue flourishing, giving it a nice product spread such as Garmin and TomTom enjoy. Also, again as mentioned above, SiRF was moving to acquire new chip technologies just like its competitors were, and in fact may have felt forced to do so as a defensive measure.
SiRF was not prepared to deal with a rise in competition from other firms offering superior technology, especially in the cell-phone product arena.
If SiRF’s technology was not superior, why has it been called the “gold standard” and been chosen to equip more high-end GPS devices than any other?
The company came under pressure to decrease prices due to market conditions, which had an adverse affect on earnings, which led to lower gross margins.
That’s probably a valid point. It’s easy to get blind-sided by the competition, especially when the chip business moves so quickly — but it’s not a crime. As I said earlier, it looks like SiRF was confident its higher-end product line would not face price erosion so quickly. Personal navigation devices (PNDs) have faced extreme price erosion in the last six months, and providers are looking at component pricing harder than ever, many times swapping quality for price. This also opens the door to competition, giving them some initial market share for lowering their price per volume share.
Lack of adequate internal and financial controls.
This question is best left to be answered by others. I will say that in all the GPS trade shows and speaking events I have attended over the years, I have never witnessed anyone from SiRF arriving in a corporate jet or limo. They stay in the same digs as the rest of us and eat in the same bad restaurants. If anything, sometimes SiRF seemed a little penny-pinching. Kanwar Chadha should be praised for his zealous proselytizing, growing the GPS industry as a whole through speaking and industry events.
SiRF made statements about its financial health and creditability of potential business prospects that were questionable in their basis when made.
Maybe it just needs better soothsayers or more corporate spies. The current shakeout will, I’m sure, help the company improve this factor of the process and identify areas that could be improved. SiRF made a mistake, but there is a big difference between that and telling a lie.
Mob Psychology. The class-action lawsuit crowd has come out in force, like a crew of vigilantes, herding disgruntled investors into their own respective corrals. Each lawyer group stands to gain significant fees for representing their clients’ interests. In turn, these actions will cause SiRF to spend millions of dollars in its defense, not to mention crippling the company if a judgment goes against it, and it should be forced to pay a settlement. (Burn Atlanta!)
Forget about SiRF being acquired by another GPS chipmaker. Nobody will even consider it until the legal outcome is determined, the docket cleared, and the lawyers head back to their offices in their Mercedes.
Market History. Hype and glitz have always surrounded the technology sector, as investors eager for high returns look to their investment advisors and listen to numerous stories about what’s hot and search for any new developments that will take off to become the next achievement of the decade. GPS was littered in its youth of the late ’80s and early ’90s with failed investment visions which eventually soured the venture and private investment sector, to the point of practically ignoring any placement of significant dollars behind pure GPS plays. Few believed the market would flourish, but the founders of the biggest GPS firms today re-mortgaged their houses, tapped their savings accounts or credit cards, and exchanged equity with family, employees, and a handful of risk-takers. Thanks to them and their beliefs, you can turn on that nifty navigation device in your car or locate your teenager at night. A few have even made it to the lists that score the richest individuals.
In a review of SiRF performance since it went public in 2004, I see little for investors to grumble about. The company has been a steady performer, for which management must be responsible, or so I would think.
Except for the last month when the you-know-what hit the fan, SiRF had fared pretty well, even with an onslaught of competition. It had good quarters, and analysts were very positive on the company and its efforts. Where I think SiRF eventually got into problems was that the market never likes big surprises, especially in a 24-hour period. SiRF may have been hit with a few last-minute delayed or cancelled orders it was expecting to come in that would have saved the day. But they did not. The day was not saved. And it was a bad day, to say the least.
Broadcom, which supplies chips for wired and wireless devices, including assisted GPS through its recent acquisition of Global Locate, has a similar story to tell in a five-year review of its stock price. You can see definite downtrend about the same time SiRF took a dive. It’s not an apples-to-apples comparison, but the similarity is striking.
TABLE 1. SiRF Technology stock price
(edit: Broadcom doesn't have GPS revenue to speak of.)
TABLE 2. Broadcom stock price
The incidence of GPS companies being hit with class-action lawsuits has been relatively low compared with other industries. In 1999, Trimble announced the settlement of a securities class-action lawsuit filed on December 6, 1995, against the company and certain of its current and former officers and directors. Trimble paid out $1.8 million. In 2006, Lowrance announced it was being sued in a stockholder class-action law-suit in Oklahoma state court. The lawsuit sought to enjoin the proposed acquisition of Lowrance by Simrad Yachting (who was not included as a defendant). Earlier this year, Verizon faced a class-action suit related to GPS. The suit alleges that Verizon intentionally disabled the devices’ free, built-in global positioning systems (GPS), then offered a proprietary Verizon fee-for-service GPS.
There has been more activity in competitors suing each other over the years on a range of issues mostly around patent and trademark complaints. These have included Trimble versus NovAtel and Garmin versus arch rival TomTom. Yet in all, nothing to the grand scale of the suits currently filed against SiRF.
End of Sermon. As I daily monitor the spectrum of GPS players, I have to ask, is this really necessary? Who is driving the boat? Is it the attorneys or the investors? Do the investors realize their chances are better if SiRF could spend the money that these lawsuits will cost (not to mention taking management’s time) to actually fix some identified issues?
Unfortunately, the boat has left the dock, and we will have to wait to see where it lands — or runs aground.
Let me make one thing perfectly clear, before competitors start gloating over SiRF’s misfortune or nosing around its customers. This is not just bad for one company. This is bad for the industry. It may be an unfortunate if unavoidable rite of passage for an industry reaching early maturity, that we see this kind of investor grumbling and lawyer bounty hunting. It is nevertheless to be deplored, and the good citizens among us should stand up and denounce such lynch-mob mentality. It can weaken all of us if allowed to run unchecked.
cp.gpsworld.com
My comment: PNDs are still toys to many people, and so these can be deferred. GPS tools will weather the downturn much better. Trimble make tools… |
