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General Instrument thwarted by SA

The set-top box maker says it will post record earnings, but its stock takes a hit after competitor Scientific-Atlanta issued a profit warning.

TV set-top box maker General Instrument said today that its third-quarter earnings will be higher than Wall Street's expectations, but the company's stock nonetheless got hit after competitor Scientific-Atlanta released a preliminary profit warning.

Shares of General Instrument fell by as much as 12.2 percent in morning trading, before closing at 19.25, down .6875 or 3.45 percent. Scientific-Atlanta's stock plunged 37.73 percent or 7.6875 to close at 12.6875.

General Instrument said it expects its third-quarter profits to come in between $36 million or 21 cents a share and $39 million or 22 cents a share, higher than the 19 cents a share analysts were expecting, according to First Call. Last year, General Instrument posted pro forma net income of $25 million or 17 cents a share for the same period.

Revenues for the quarter, driven by the strength of General Instrument's digital set-top box business, are anticipated to reach $518 million, up from $465 million reported a year ago. Lawrence Marcus, an analyst with BT Alex. Brown, said he had expected revenues of $510 million ahead of the announcement.

The company will report its earnings on October 27.

"The news was very positive for General Instrument. It confirmed that their cable business is on a strong growth path," said Eric Buck, an analyst with Donaldson Lufkin & Jenrette. "And as you get into the details of the Scientific Atlanta release, they are either specific to SA or in markets General Instruments isn't in."

Despite such sentiment, investors punished General Instrument's stock.

"Like cockroaches in the kitchen, there is never just one," Buck said. "Investors never assume that the problem is just affecting one company."

He estimated that General Instrument's digital set-top boxes account for 36.6 percent of the company's total revenues, and that its satellite business--which connects set-top boxes to wireless technology rather than to cable--makes up 19 percent.

In issuing its warning, Scientific Atlanta reported that sales of its digital boxes had increased, but not enough to offset losses in other areas of the company's business. Buck noted that SA is beginning to launch its digital program, but estimated that the program will account for only $20 million or less than 10 percent of the company's anticipated $257 million in sales.

"It should ramp up by the end of the fourth quarter," he said. "SA had some issues with its initial ramp-up, but in terms of demand from their customers and their customers' customers, I feel positive about them."