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Vitesse turns in lackluster quarter

The communications chipmaker hits reduced estimates in its second quarter but warns that excess inventory and "murky" visibility may result in lower sales and earnings next quarter.

Vitesse Semiconductor, the first communications chipmaker to report earnings this quarter, met analysts' reduced estimates in its second quarter, posting a profit of $18.8 million, or 10 cents a share, on sales of $121.8 million. It also scaled back its estimates for the third quarter.

After the company twice lowered estimates earlier this quarter, the First Call consensus estimate fell to 10 cents a share from an original target of 21 cents a share.

Vitesse shares closed off $1.65 to $24.05 ahead of the earnings report before falling to $22.14 in after-hours trading.

Vitesse's lackluster performance and Cisco Systems' latest profit warning offer conclusive proof that the worst is not yet behind the network-equipment sector.

"The (sluggish results) are really across the board," said Cody Acree, an analyst at Frost Securities. "The only fortunate thing about this from Vitesse's perspective is its problems are not company-specific. The news probably doesn't get a lot worse, but then again there aren't a whole lot of catalysts for component makers right now."

Acree had expected a profit of 11 cents a share on sales of $120 million.

The $121.8 million in sales represents a 21 percent improvement from the year-ago quarter when Vitesse earned $24.4 million, or 13 cents a share, on sales of $100.3 million.

However, sales fell 26 percent from the first quarter when it earned $47.6 million, or 25 cents a share, on sales of $165.1 million.

"It was a very poor quarter," Chief Executive Lou Tomasetta said during a conference call with analysts. "Very disappointing. In our experience over the past 17 years at Vitesse, we've never seen a situation where essentially every one of our customers reduced their forecasts at the same time."

Gross profit margins in the quarter fell to 62.2 percent from 68.3 percent in the first quarter.

Telecommunications chip sales fell to $74.3 million in the quarter, down 22 percent from $95 million in the first quarter. Data communications chips tumbled to $36.4 million in the quarter, off 38 percent from $58.8 million in the prior quarter.

"There was a very serious degradation in demand for all our existing product lines," Tomasetta said.

Working through excess inventories remains the biggest concern for Vitesse and other communications chipmakers such as Broadcom and Applied Micro Circuits following the unprecedented surge in new orders during the past two years.

Major Internet service providers and telecommunications carriers increased capital spending by 25 percent in 2000 after boosting expenditures by 32 percent in 1999.

Before Cisco's warning Monday, Morgan Stanley predicted that capital spending for 2001 would grow only between 2 percent and 3 percent this year and then decline by that amount in 2002.

"It's my expectation that our customer base will come to grips with the inventory correction this quarter," Tomasetta said.

In detailing the company's third-quarter profit warning Monday afternoon, Cisco CEO John Chambers confirmed the company would write off more than $2.5 billion in excess inventory this quarter.

Tomasetta said Vitesse "should have better visibility coming out of the current quarter than we had coming out of this one."

Inventory and more inventory
"What's interesting about Vitesse's results is they are the first communications chipmaker to report this quarter," said Jim Liang, an analyst at WR Hambrecht. "It's suffering from a combination of excess inventory built up in the past year and the slowing economy."

Ahead of the earnings report, Liang pegged Vitesse for a profit of 10 cents a share on sales of $120 million.

"The key is how soon these inventories can be reduced so we can get a better indication of what the real demand is from end users," he said. "Right now, as they've said, the visibility isn't good enough to accurately predict when things are going to improve."

In the third quarter, Vitesse executives expect the company to post a profit of between 3 cents and 7 cents a share on sales between $90 million and $110 million. Gross profit margins are expected to fall to between 59 percent and 60 percent.

"Visibility continues to be very murky," Tomasetta said. "Forecasting is risky at this point."

First Call consensus expected Vitesse to earn 8 cents a share on sales of $108.6 million in the third quarter.

Vitesse shares marched up to a 52-week high of $95.19 in October before falling to a low of $15.13 earlier this month.

Sixteen of the 20 analysts tracking the stock rate it either a "buy" or "strong buy."