Vitesse Semi and LSI Logic warn

3 min read

Two more chipmakers warned of slowing sales growth Monday. Vitesse Semiconductor and LSI Logic reduced forecasts for their upcoming quarters, blaming continued weakness from communications and data storage customers.

Shares in Vitesse Semiconductor (Nasdaq: VTSS) were off 81 cents a share to $37 and LSI Logic (NYSE: LSI) was unchanged from its Friday close of $16.31 on the Island ECN ahead of Monday's opening bell.

Vitesse said it now expects second-quarter revenue to be between $150 million and $160 million, down from projections of $180 million to $190 million, and said pro forma net income will fall in the range of 21 cents a share to 22 cents a share, compared to previous targets of 26 cents to 27 cents a share. According to First Call, Vitesse was expected to report a second-quarter profit of 26 cents a share on revenue of $177.6 million.

Vitesse makes chips that companies such as Cisco Systems (Nasdaq: CSCO), Lucent Technologies (NYSE: LU) and IBM (NYSE: IBM) use in their network and automatic test equipment. Considering recent warnings from those companies, and the downward flight of Vitesse's peers, such as Broadcom (Nasdaq: BRCM) and Applied Micro Circuits (Nasdaq: AMCC), it could have been anticipated that Vitesse would follow suit.

But recent analyst chatter has kept Vitesse shares afloat. The company had already watered down second-quarter expectations when it announced its first-quarter results, but several analysts upgraded or reiterated "strong buy" ratings during the past month.

CEO Lou Tomasetta said in a release that on recently reviewing February's business it became apparent that a continuing loss of visibility among communications customers and an unexpected decline in storage applications was putting estimates at risk. He added that Vitesse still sees strong growth in its network-processor and switch-fabric accounts, as well as others, and believes these areas are softening the blow from communication integrated-circuit suppliers.

Analysts were still upbeat on the stock Monday. Prudential Securities analyst John Barton reiterated his "strong buy" on the stock while lowering his 12-month target prices on his whole universe of communications chipmakers.

"No company is immune to the slowdown. However, we continue to believe that Vitesse is best positioned," Barton wrote in a research note. He added that the revised projections, which make the revenue decline 6 percent sequentially, still leave the company better off than its peers.

Barton noted that "Vitesse shares have already been trading as if they were going to miss the quarter," but nevertheless slashed his price target to $53 a share from $100 a share.

LSI Logic
LSI Logic (NYSE: LSI), which also makes communications and storage semiconductors for data, voice and video, said first-quarter revenue is now expected to be down around 30 percent from its fourth-quarter revenue of $751 million, compared to the previously expected 12 percent decline. Earnings are expected to be 3 cents a diluted share, down from the 21 cents the company earlier projected. Year-ago first-quarter earnings were 26 cents a diluted share. Gross margin is expected to be about 40 percent.

According to First Call, LSI was expected to report a first-quarter profit of 21 cents a share on revenue of $780 million.

The company also said it has started cost-reduction measures to align operating expenses with current revenue projections. Its goals are to improve profitability without impairing LSI Logic's competitive position.

In late January, LSI cut its second-quarter projections, but said it was expecting a rebound in the second half.

The company changed its tune Monday. CEO Wilfred J. Corrigan said he is confident of revenue growth when the economy improves, but "we do not have sufficient visibility at this time to accurately predict the timing for the resumption of growth," he added.

Overall chip sales have declined
The warnings accompanied a report from the Semiconductor Industry Association (SIA) Monday that showed overall chip sales declined 3 percent year-over-year, a significant drop from the 22 percent gain posted in December 2000.

UBS Warburg analyst David Wong noted that given the statistics, and recent news from companies, "year-over-year growth in total semiconductor sales will remain low through at least the next five months." On the bright side, Wong said, "current weakness in semiconductor shipment growth could result in a build up of demand, which might lead to a strong second half of 2001 in some, but not all, sectors."