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Silicon Storage outlook dings shares

    Silicon Storage saw its shares lose more than 11 percent on Friday, after the company missed estimates for its fourth quarter and cut its 2001 outlook due to cancelled orders and a slowing PC sector. The stock was downgraded, but most analysts remained positive on the company's long-term outlook.

    Shares of the company, which makes flash memory products for computers and handheld devices, fell $1.69 to $12.88 in pre-session trading on the Island ECN electronic trading network.

    After market close Thursday, the Sunnyvale, Calif.-based company reported net operating income of $40.9 million, or 42 cents a share, excluding charges, on revenues of $161 million for the quarter. First Call consensus had expected earnings of 46 cents a share.

    The figures were up from the $5.7 million, or 7 cents a share, on revenues of $48.3 million seen in the fourth quarter of 1999.

    Including acquisition-related charges, net income was $37.3 million, or 39 cents per share for the fourth quarter of 2000.

    But the real story was Silicon Storage's outlook. The company said that that first quarter sales would be flat to 10 percent lower, sequentially. Earnings for the full fiscal year were cut to $1.50 to $1.75 a share, well below the Street's consensus earnings figure of $2.48 for the period.

    Analysts reacted to the news by cutting earnings and revenue estimates for the company, but the general thesis was that Silicon Storage's long-term position remains solid.

    The company was downgraded to "buy" from "strong buy" at First Union Securities, and the 12-month target price was set at $20. But analyst Bennett Notman remained positive on the overall picture.

    Notman said the effects of the global slowdown in the semiconductor sector during the fourth quarter of 2000 have been already factored into the company's share price. "We believe that the shares present an excellent investment opportunity for investors with long-term horizons," the analyst wrote in a research note.

    At Credit Suisse First Boston, analyst Tim Mahon took a similar approach. The analyst "drastically" cut revenue and earnings numbers for the upcoming quarter and fiscal year, but maintained a "buy" rating on the company, "owing to the company's solid long-term potential".

    Analyst Jonathan Joseph at Salomon Smith Barney praised the "extraordinary job" of Silicon Storage in growing revenues by 293 percent, while overall flash sales in the sector rose by 116 percent.

    However, the analyst recognized the rough ride ahead for the company, noting that he believed the Flash market was only in the second quarter of a year-long correction. Joseph cut estimates for the coming quarter and fiscal year, trimmed the stock's price target to $15 from $35, but maintained a 3S rating on shares.