Cyrix is back in the black

Following three consecutive quarters of losses, Cyrix (CYRX) swung into the black this quarter, due to acceptance of its MediaGX chip.

The supplier of high-performance processors reported a net income of $6.6 million, or 33 cents a share, beating expectations by a whopping 24 cents a share. Earnings are up from $2 million, or 10 cents a share, reported for the corresponding period last year.

Cyrix attributes the strong result to healthy customer acceptance of its MediaGX and 6x86 chips, higher gross margins, and enhanced manufacturing efficiencies. Stronger-than-planned unit shipment performance at the end of the quarter contributed.

The company stock, however, lost about ten percent in trading today from yesterday's close of 19-1/2. Wall Street was expecting the company to report earnings of 9 cents a share, according to First Call.

Revenue for the quarter ending March 31, was $75.6 million, up from the $51.6 million reported in the same period last year. They grew five percent sequentially from the fourth quarter of 1996, and gross margins also improved sequentially to 44 percent from 21 percent.

It has been up-and-down quarter for the stock's valuation, and it is now trading at the level when the quarter began. The stock had gained over 10 points by mid-February, but then slid back to as low as 17-1/2.

"This business is no longer a matter of selling a microprocessor," said James Poyner, an analyst with Oppenheimer and Company. He explained that chipmakers that want to keep up with Intel (INTC) are going to have to come up with their own motherboards to compete, "and it is going to make it tough for Cyrix going forward," he said.

In addition to trying to keep up with the performance level of Intel's products, smaller companies face the problem of coming out with new products as fast as the giant chipmaker, he said.

"But the real issue is the M2," Poyner said. "Is it really going to have anything incremental to offer? After Intel starts to ramp in the second quarter, combined with very aggressive price cuts, that should leave only room for two big players. Cyrix will be forced to stay way down the food chain."

Cyrix wants to coexist with Intel, not go head-to-head in competition, such as AMD (AMD).

"It is a brutal price situation, and clearly Cyrix is radically different from AMD. Cyrix tried [to go against Intel] last year and that was a disaster," said Poyner. He explained that Cyrix wants to be the prominent player in sub-$1000 personal computers with its GX. "But Intel is going to play there too as they take an older Pentium and put it in a cheaper box," he added.

And of course, there is the issue of price pressures. As Intel gets ready to announce its quarterly price cuts on April 28, competitors are already in the process of reacting. Analysts suspect that Intel's price reductions will bring a round of cuts across the board.

A Salomon Brothers analyst report states that Cyrix is faced with a number of obstacles that could harm future earnings, despite that the Cyrix chip was selected for Compaq Computer's (CPQ) new $999 Presario PCs. Not only will the M2 will have to compete with AMD's K6, but IBM, which will have the rights to the M2, could undercut Cyrix on average selling prices. Analysts say the window of opportunity is limited and delays could hurt acceptance of the product. Management also s still in flux as the company has yet to name a permanent replacement for CEO Jerry Rogers.

During the quarter, Cyrix settled a dispute with Intel over the use of MMX term to describe enhanced multimedia capabilities in its computer chips. The agreement requires Cyrix to attribute MMX as a trademark of Intel but does not require a royalty payment.

Next quarter, Cyrix plans to transition from its 6x86 chip to its new M2 processor with MMX technology. The company plans initial production shipments of the M2 in June with a full production ramp-up in the third quarter.