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Chipmaker Cypress chops estimates on weakening demand

The economic slowdown hits the semiconductor company, which says it will fall short of revenue expectations for the first quarter.

The economic slowdown has trickled down to Cypress Semiconductor, which said Monday that it would fall short of revenue expectations for the first quarter.

Cypress said revenue would fall 24 percent from the $370 million posted in the fourth quarter of last year. The company previously estimated that sales would slip 4 percent to 9 percent.

Earnings before goodwill are expected to be between 30 cents and 34 cents per share, significantly below the First Call consensus of 56 cent per share.

The San Jose, Calif.-based Cypress makes integrated circuit products, including programmable logic devices used in the communications, computer and electronics industries. Company customers in those industries have been seeing slumps in sales of their products, which has triggered similar problems at the company.

The Cypress warning was expected. Other makers of programmable logic devices, including Altera and Lattice have issued warnings as well in the past week. It said 15 percent of the revenue drop was due to softening business conditions.

"Business conditions have not improved in the market segments that we serve. Average selling prices are reasonable but our unit volume has dropped as our customers burn up their excess inventories," CEO T.J. Rogers said in a release. "Cypress experienced cancellations and push-outs in January, but we were not alarmed because we anticipated them. We assumed that February and March would revert back to normal bookings but we saw no material improvement in the trends," he said.

Analysts didn't wait for Cypress' news to cut their estimates. Robertson Stephens analyst Eric Rothdeutsch lowered his rating on the company from "buy" to "long-term attractive" last week after competitor Integrated Device Technology preannounced and lowered revenue expectations.

And Morgan Stanley analyst Mark Edelstone dropped estimates for Cypress for 2001 from $2.30 per share to $1.50, and cut his price target from $40 to $30. Edelstone was estimating a 16 percent drop in revenue based on slowing demand.

But the slowdown is also prompting changes in Cypress' business model that are responsible for a one-quarter, 9 percent drop in revenue.

A "large strategic customer" has asked to convert a "high-volume" program to consignment sales, essentially delaying payment on Cypress products until it actually uses them. The company is reversing $9 million in revenues to account for unused product currently sitting in that customer's warehouses.

Cypress is also shifting its business model in its European and Asian markets, allowing distributors there to hold products in their warehouses for a time before they are recognized as sales. Previously, the company had recognized sales as soon as the product was purchased by distributors, eliminating the risk of returns, but limiting the number of orders.

"The net result is that these distributors order from us only what they already have orders for or know they can sell quickly in their non-U.S. operations. This practice limits our distribution business in Europe and Asia," Rogers said. "To sell more, our global distributors need to be changed over to the U.S. method--end sales accounting. That change to improve our European and Asian competitiveness means we must reverse revenue equivalent to the current inventory of our global distributors in their Europe and Asia locations, a $25 million one-time revenue reduction," he added.

Looking ahead, Cypress is in a better position than it was in the last downturn, "primarily due to its focus in high-growth, datacom-oriented segments of the market--wide area networks, storage attached networks, wireless terminals and wireless infrastructure," Rogers said.

He also said that the company will re-evaluate business conditions for the rest of the year and announce new estimates for fiscal 2001 in April.

Cypress wasn't the only semiconductor company warning Monday. Vitesse Semiconductor said second-quarter pro forma net income would be between 21 cents and 22 cents per share, below the previous estimate of estimate of 26 cents to 27 cents. First Call consensus was for a profit of 26 cents per share. Vitesse cut revenue forecasts by about 21 percent, to $150 million to $160 million, from a range of $180 million to $190 million.

The company makes high-speed, GaAs (gallium arsenide) devices used in communications and automated test equipment, especially for high-speed communications and networking equipment. Vitesse cited "loss of visibility among our communications customers and the unexpected decline in our storage applications" as reasons for its shortfall.