Communications chipmakers slammed

Vitesse Semiconductor shares fall after the company lowers projections for the second time in three weeks, while rival TranSwitch drops after a profit warning.

3 min read
Vitesse Semiconductor fell 14 percent after it ratcheted down projections for the second time in three weeks, while rival TranSwitch was off 20 percent after a profit warning.

That double dose of bad news followed profit warnings Monday from communications chipmakers PMC-Sierra and Conexant Systems.

The latest warnings from Vitesse and TranSwitch prompted analysts to cut their estimates for the whole sector, in some cases for the second time in two days.

Vitesse Semiconductor, which closed down $4.88 to $29.06 Tuesday, makes chips used in communications and automated test equipment. Vitesse gets almost 90 percent of sales from networking giants Lucent Technologies and Cisco Systems, two companies that see weaker-than-expected sales ahead.

Vitesse said late Monday that it now expects second-quarter revenue to be between $120 million and $125 million, below its previous range of $150 million to $160 million. Net income projections have been lowered to 10 cents to 11 cents a share from 21 cents to 22 cents per share. First Call had been expecting earnings of 20 cents a share and revenue of $165 million. Just three weeks ago, Vitesse had expected sales of $180 million to $190 million.

The news sparked worries that Vitesse's problems could spread into the next two quarters. Credit Suisse First Boston analyst Charles Glavin reduced his rating on the stock to "hold" Tuesday and lowered his price target to $30.

Glavin said that though the company was mum on June projections, he believes "growth for the next two quarters will be tempered as well."

TranSwitch, which closed down $3.75 to $15.13 Tuesday, reduced revenue expectations for the second time this quarter. The company said it now expects to post revenues of $38 million in the first quarter and pro forma net income of 9 cents to 10 cents a share, compared with First Call's consensus estimates of 16 cents a share for earnings and $53 million in revenue.

These two warnings were enough to provoke another round of downgrades for the entire sector. On Monday, PMC-Sierra and Conexant also issued profit warnings. The companies blamed continued weakness in demand and order cancellations, a common affliction for the sector.

"Despite lowering our estimates on the group yesterday, we didn't cut deep enough and thus are further lowering our estimates for PMC-Sierra, Conexant, TranSwitch and Vitesse," said Goldman Sachs analyst Nathaniel Cohn, who has lowered his estimates three times this quarter.

"During the past two weeks many of these companies' customers have come back and not only canceled orders, but have asked that they not honor prior commitments for delivery," Cohn explained. He added that the companies' willingness to oblige customer requests and allow "the correction to occur at a steep pace," is a good thing, but it also means that demand will remain murky.

UBS Warburg analyst David Wong downgraded Vitesse and TranSwitch on Tuesday. Wong chopped Vitesse to "buy" from "strong buy" while Transwitch was downgraded to "hold" from "strong buy."

Wong said that while Vitesse's downgrade was based on a murky outlook for the near term, TranSwitch has more serious problems including the risk that the international markets may weaken.

A few analysts noted that Vitesse was the best of a bad lot. "Vitesse's poor results actually compare relatively well vs. some of the competition," said Dain Rauscher Wessels analyst Shekhar Wadekar, who reduced his rating to "buy aggressive" from "strong buy."

The company's "extremely weak fiscal second quarter is more a reflection of the deep downturn in the semiconductor industry than a reflection of any particular shortcoming of Vitesse," he added.

Though analysts were quick to cut estimates and ratings, most remained optimistic about the long-term prospects for all the communications chipmakers.

"Although we see no signs for an immediate stock recovery, we do believe the stocks will return well ahead of the fundamentals," wrote Goldman Sachs' Cohn. That won't be soon though, with most of these stocks "still quite high relative to their price to sales ratios in 1998," the analyst cautioned. "We could still see a downside in many of the names."