Ian and all, another overreaction of interest...
Dow Jones Newswires -- October 8, 1999
DJ Tiny Hi/Fn's Warning Sends Wide Swath Of Shock Waves
By Christopher Grimes
NEW YORK (Dow Jones)--An earnings warning from Hi/Fn Inc. (HIFN), a small company involved in the hot business for chips used in the networking industry, sent shock waves through the computer hardware market Friday.
Hi/Fn - pronounced "hyphen" - said two primary customers, Lucent Technologies Inc. (LU) and Quantum Corp.'s DLT & Storage Systems Group (DSS), had cut back their orders because they already had too much inventory.
That news sent high-flying Hi/Fn's shares plummeting. The stock had fallen 32, or 43%, to 42 by midday Friday. It fell 30% Thursday when the concerns were first raised in a Wall Street research note.
Worries about swollen inventory at Lucent sent down shares of other chip companies that supply the telecommunications and networking industry, too. Clark Westmont, an analyst at Salomon Smith Barney, downgraded shares of Vitesse Semiconductor Inc. (VTSS) and PMC Sierra Inc. (PMCS) on these concerns.
"I am concerned about inventory stockpiling by customers, and Lucent is a case in point," Westmont said.
Westmont said there seems to have been a "shortage mentality" over the past few months as companies prepared for the year-2000 transition. "The sky is not falling ... (but) this could lead to an order slowdown."
He stressed that there doesn't appear to be a demand problem in the industry, but an inventory management problem at Ascend Communications, which was acquired by Lucent.
Companies that sell chips used in telecommunications and networking have been the fastest-growing segment of the rebounding semiconductor sector, and they had the stock prices to prove it. HiFn certainly fit in that category, with its nifty "compression" technology that allows 10 pounds of data to fit into a five-pound bag, as one market observer put it.
"If you look at the build-out of the Internet infrastructure, it's being done by equipment from Lucent and Nortel" Networks Corp. (NT), Westmont said. And those companies buy chips from the likes of PMC Sierra, Vitesse and Hi-Fn.
Only a month ago, Hi/Fn Chief Executive Raymond Farnham told CNBC that networking revenues had doubled in the first nine months this year, and he expected that trend to continue for four more years.
HiFn's stock soared earlier this year: when it reached an all-time high of 151.75 Sept. 8, it was up 542% from the start of 1999.
"You can see why (Hi/Fn) was hot and sexy," said one buysider who said he had a short position in the stock. "It's really cool technology, it had all the right buzzwords and a unique patent position."
Many stocks were hurt on the news. DSS was down 2 3/4, or 20.6%, to 10 5/8. PMC-Sierra fell 8 11/16, or 8.7%, to 91 3/16. Vitesse fell 6 5/8, or 7.7%, to 79 5/8. Cypress Semiconductor Corp. (CY) shares fell 2 3/8, or 9.5%, to 22 7/8.
Lucent had no comment on the analysts' reports of an inventory problem. In a statement, Quantum said it is re-engineering its supply chain with the goal of reducing inventory.
Paul Sagawa, an analyst at Sanford Berstein, said Lucent has been criticized this year for allowing its inventory to swell, so the company set a goal of reducing inventory in the September quarter. That it has cut back on ordering parts - like Hi/Fn's chips - is a sign that Lucent is taking steps to cut back its inventory.
"Hi/Fn's explanation is clear evidence of the action Lucent has taken this quarter to address (the inventory) issue,' Sagawa said. "Unfortunately, small suppliers like Hi/Fn are at the end of the whip."
Lucent shares were down 1 3/16, or 1.8%, to 64.
Other communications chip companies down on the Hi/Fn news included Transwitch Corp. (TXCC), Applied Micro Circuits Corp. (AMCC) and Broadcom Corp. (BRCM), analysts said.
Transwitch fell 9, or 15%, to 49. Applied Micro fell 9 1/2, or 12.6%, to 66. And Broadcom shares fell 3 15/16, or 3.2%, to 120 1/8.
Tim Summers, an analyst at Advest, said the selloff in Transwitch shares wasn't justified because the company's sales to Lucent are good. -Christopher Grimes, Dow Jones Newswires, 201-938-5253
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