Tuesday, December 21, 2004

MERX plays the same tune as JBL & SLR

MERX is a speciality EMS supplier for high-end equipment which reported lower revs but in-line EPS and the guidance was lowered. Basically weak-end market demand hurt the revenue line whereas better mix of products manufactured helped gross margins. MERX was hurt by ERICY moving business to other suppliers and lower. Premium revenues picked up as customers order with shorter lead times, meaning customers are only producing boxes if they are certain those boxes can be sold to end customers. Overall the confidence in end markets is still low.

Overall book to bill was 0.88 but it was better in last 3 weeks of December (1.1) especially for telecom and networking(CSCO, JNPR, NT) similar to what JBL and SLR suggested regarding that particular end market.

Solectron: End market demand to blame?

SLR reported earnings after market today and had nothing nice to say with lower than expected revenues due primarily to weak end markets. Also lowered guidance for next year with emphasis on 2nd half of 2005. We have heard this back-end loaded story too many times to believe it now so companies should just find better tag-lines to use for their spins.

Unlike JBL yesterday, SLR was more straightforward in laying out the landscape. "Demands softened throughout the quarter and volume that we expected late in the quarter did not materialize". Weakness particularly in set-top boxes (TIVO, PHG), 3G handsets (NEC), computing and PC (HPQ, IBM, SUNW) saw strength in peripherals and low-end servers with high-end being weak. Semiconductor Test remains in downdraft (TER, A) which suggests semiconductor back-end demand is not picking up which would suggest overall lower units and coupled with lower prices its just not a pretty sight for Semiconductor companies. Networking (CSCO and NT) was weaker than expected but SLR expects networking to pick up in February quarter as customers start ordering again as their inventories are worked down.

All in all nothing to suggest end markets are coming back to life, we might see some year-end buying for PC/Servers and Networking but inventory draw-down is the game being played right now. If end markets do not have a sustainable pick up we might have another round of lower than expected quarters by Semiconductor suppliers. I think there is pockets of strength in networking and PC/Computing but nothing to suggest we will see same level of budget-flush we saw last year this time. Time to take money off the table in tech- especially from selective Semi names.

Monday, December 20, 2004

Jabil speaks: end-markets are OK

JBL is one of the leading EMS supplier manufacturing products for variety of end markets. JBL commentary was fairly positive for consumer market indicating end-market demand was strong. Other sectors performed as expected but JBL is slightly more optimistic regarding the communications sector helped by stable end-market. JBL feels the environment has improved from 90 days ago, I believe we could see some year-end spending pick up in this sector as well. The only negative was that inventory turns declined mostly due to execution issues.

Wednesday, December 15, 2004

Best-Buy: Good sign for Consumer electronics

BBY reported earnings this morning that are slightly ahead of expectations, also updated guidance for FY2005 which seems in-line to slightly positive. "Month-to-date revenue is on track with our expectations," stated Darren Jackson, executive vice president and CFO. Seeing strength in "digital televisions, MP3 players, digital cameras, notebooks and appliances, among other areas."

Maybe we won't have to worry about consumers' willingness to spend on discretionary items after all. But I am still concerned about slower than expected price declines on digital TVs and how that might affect demand for semis that go into those TVs. Seems like BBY and other retailers are lowering prices at a tepid pace which is leading to slower than expected unit pickup. But we still have 15 days to go until the end of the year, anything could happen.

Tuesday, December 14, 2004

Triquint: the next semi to fall

TQNT became the next semi company to lower guidance for Dec qtr during its mid qtr call today. Dec guidance is now 18% to 19% sequential decline in revenues versus prior expectation of 11% to 15% decline. TQNT blamed wireless and optoelectronics softness for the lowered guidance. TQNT expects flat revenue in 2005 with second half accouting growth. Q1'05 visibility looks weaker for handsets which could have a negative affect on vendors like STM, TXN, AGR, RFMD, SWKS, SLAB.

TQNT which originally was a provider of components for handsets entered into optoelectronics business through acquisition (another one of those buying growth schemes). The issue with TQNT and many tech/semi companies is that they refuse to accept that their technology portfolio is becoming extinct and instead of right-sizing managements opts for self "full-employment" by attempting to buy growth. I have highlighted COMS and AMCC in the past as companies that are going through similar situations. So what is wrong with aTQNT technology you might ask? TQNT makes various components for handsets and those components are becoming obsolete thanks to QCOM incorporating those functions into its chipsets (for CDMA). TQNT originally did not participate in the GSM market, and revenues from GSM are immaterial currently accounting for 2% market share. TQNT's optoelectronic business (the one they bought for growth from AGR) has been losing money and has gone through massive layoffs, remains to be seen when that business reutrns to profitability. The remaining revenue come from wireless infrastructure (wlan chips and ICs for base stations) and we all know how competitive that market is. TQNT management believes they are positioned to make inroads into GSM and EDGE components. Yea from a small base its pretty easy to make inroads but will they have enough traction to make a dent in their operational issues.

Basically, it boils down to TQNT not being able to spend enough to keep up with market needs and not having enough scale to do anything well. On top of that add the inventory and end demand situations and you got a serious mess in your hands.

Oh yea TQNT announced they spent $3M to buy another company today but atleast its a profitable company.

Forbes.com Best of the Web

This humble little site got mentioned by Forbes.com as one of the Best of the Web in the Investing Blog category. I thought my family and I were the only ones that read this blog. Hopefully the increased attention will lead to more interactive discussions. Keep reading and make comments as you please. I would like to clear up one thing, I focus more on GARP oriented investments, rather than pure Value based approach. My background includes stints at traditional money management firms and a hedge fund. I believe I am a student for life and have a curious mindset which is why I crave feedback.

Monday, December 13, 2004

Don't spoil this party

Markets are running into closing days of 2004. I am not the one to spoil this party but discretionary spending on high and mid class furniture is taking a tumble, ask FBN. Do you consider the new flashy flat screen TV as discretionary? Consumers are certainly spending money this season but big ticket items continue to lag and without the continued enthusiasm from consumers there are plenty of companies that have more downside then up. With cheap financing dissipating could consumer demand be behind?

On a lighter note, FBN also plans to pay well to its dead executives. High-end furniture demand might be dying but dying certainly has its benefits!

Adtran still looking for footing in Broadband

ADTN pre-announced after the market close today and lowered revenue guidance to $100M-$104M from previous guidance of $115M-$120. This is the second quarter in row that ADTN has lowered guidance. This does not bode well for traditional equipment providers especially given that there are still 17 days left in the quarter- unless they are closing shop. Last quarter ADTN blamed "Broadband" (DSLAMs & IADs) weakness and some missteps (moving from ADSL to ADSL2+) for the lower revenue and they are blaming broadband again this quarter. To me last quarter miss seemed that it was more than just broadband and most probably that will be the case this time as well. Broadband or what is non-traditional ADTN revenue account for less than 20% of revenues and its tough to picture a 15% miss that is based entirely due to this segment of revenues.

ADTN has been hoping that non-traditional products contribute growth to its top line but it remains hard to come by. ADTN has had no success winning recent FTTx initiatives by the RBOCs. SBC picked ALA as its primary supplier for project LightSpeed and ADTN got no business for its DSLAMs (expected source of growth). With its traditional HDSL business running out of room to grow (20% y/y for last three quarters whereas T1 line growth has been single digit y/y) and broadband opportunities missing, ADTN stock has a lot more down side then upside as company not only losses revenue but also credibility.

3COM thinks it can buy growth (expensive growth)

COMS announced that it intends to buy TPTI for $430M in cash. CASH! that's 34% of the cash COMS has, what are they thinking? Keeping acquired companys' management in the game is tough when you hand out cash to them. The risk of this acquisition of not working out is high. The $430M purchase price works out to be over 10x sales (who said the bubble is over). I cannot see how COMS sustains its valuation with its base of cash much lower and higher operating expenses eating into what is left. Cash per share is reduced from $3.25 to $2.14, imagine what happens to the value oriented buyers as the "floor" on the stock is lowered.

TPTI which makes Intrusion Prevention systems is one of the young enterants in the hot security market. SYMC, ISSX, CSCO, MFE all play in this arena. Security and enterprise markets provide few synergies to COMS. Security decisions are made by IT not by network administrators and selling to two different set of decision makers is a very tough task. Cost synergies or vendor rationalization are not great arguments to present to these decision makers.

Security products are sold through speciality security resellers where COMS has no traction currently. TPTI products sells for much higher price points then COMS products which are directed toward price conscious lower-end of the enterprise switching market. COMS has little success in building a strong channel into the enterprise market as witnessed by COMS recent miss. You can ask JNPR how tough it is to enter the enterprise security channel even with great products as JNPR has missed security revenues for last three quarters.

Monday, December 06, 2004

3COM misses again

Is any one keeping track of how many times COMS has missed internal guidance? Well today's pre-announcement was the third consecutive miss, now that's a trend we can rely on! Management lowered its own guidance on both revenues and EPS which tells you not only is sales hard to come by, they might be having issues with pricing as well. Gross margin guidance was lowered to 35% from 38%.

My take is that COMS is having market share loss that can not be turned around by just lower pricing, corporations still care about quality. As DELL has figured out how to make cheap L2-L3 switches that can hold their own. Even having a partnership with Huawei does not help COMS at least not in the U.S., what Siemens can do in Europe with Huawei remains to be see. So this might suggest that the world outside of China (atelast the US) is not ready to accept Huawei or ZTE products just yet and lower pricing is not everything. COMS is struggling against not only CSCO, EXTR and FDRY but also HPQ, NTGR.

This might also hint that "the intensified competition from Asian vendor" comment by Chambers on CSCO call was maybe due to pricing competition at higher level router products instead of L2-L3 switches, which is even more troubling. But the quality remains the differentiator, at least for now.

BellSouth Speaks

BLS held its analyst day today. Didn't really hear anything that makes me wanna jump. But here are few pointers which I thought are worth mentioning:

Expect wireline related capital expenditure to be flat with 2004 spend or about $2.4B. Have you looked at what the growth expectations are for box makers like LU, NT? Obviously there will be more spend towards IP/MPLS (boxes made by JNPR and CSCO) broadband and VoIP equipment. The street sure is not looking for flat year in 2005. Yes I agree BLS is just one component in the capital expenditure puzzle but the trend is clearly nothing to get excited about. Total capex will be at $6.8B to $7.2B primarily driven to Cingular.

Another non-shocker was the announcement that BLS won't be jumping into the TV offering business like SBC is planning to do with its IPTV initiative with MSFT. BLS is going to focus on getting ADSL 2+ rolled out and expectations are to reach 3M households, which is in the ball park of what VZ expects from its FTTP plan. This really does not benefit your favorite optical component supplier JDSU - as the management stated during the Q&A at their analyst day last week since JDSU can only address $50/home out of $150/home potential. This was not a big surprise to me but some people became little more realistic after listening to that comment.

BLS plans to spend $225/home passed for the upgrade to fiber plants and $80 incremental spend on ADSL/home passed which totals $305/home; well below $500-$600 SBC suggested it was going to spend for video system to its customers. Which strategy wins at the end depends on customers willingness to buy video from their phone providers. CMCSA, TWX and COX are not sitting still.

BLS suggested DSL trends are appearing to be accelerating thru Oct and Nov but driven by pricing cuts. So that might help some of the DSLAM providers and DSL chip providers, but remember there was inventory overflow last few quarters.

Other than that I did not hear anything else that was very exciting. But I am known to doze off during boring web casts.

Friday, December 03, 2004

Rance of Wall Street?

Recently this site has been mentioned at other much more popular destinations of blogging community. Om Malik of Gigaom.com mentioned my thoughts on INTC today. EuroTelcoblog a blog run by James Enck recently introduced this site as a possible "Rance" of Wall Street. David Jackson at SeekingAlpha introduced this site as full of pithy and original analysis. I am grateful to all the veterans of the blogging world for including me in their community.

I don't know about this "Rance" character but I am only trying to provide my thoughts on the market (mostly Tech) without prejudice. I do tend to pay more attention to Semiconductor companies and Telco related companies because that is where I spend most of my time professionally. Writing is another passion of mine hence this site was created. For new visitors, please spend some time reading through older posts on this site as well. I appreciate feedback from visitors/experts/critics.

Thursday, December 02, 2004

Intel surprise should lift the market, but what is really going on??

Most on the Wall Street expected INTC to narrow its revenue guidance to $8.9B to $9.2B from prior wider guidance of $8.6B to $9.2B. Most expected INTC to remain fairly conservative and especially gross margin guidance was expected to remain unchanged at 56%. There were even some who expected INTC to just maintain its prior guidance and perhaps lower gross margin guidance. INTC however surprised the street by raising the revenue forecast to $9.3B to $9.5B and to add fuel to the fire gross margin expectations have potential of coming in higher as well. The guidance for gross margin was changed to 55% to 57% versus 54% to 58%, which if I do my math correctly seems the midpoint is same in both cases.

Better enterprise spending was indicated by many PC related companies such as DELL, HPQ, TECD. Server units were certainly stronger as noted by OEMs. Notebooks seemed to have picked up due to falling LCD prices and the pickup in units and better mix is certainly better than INTC had expected. Higher units of server chips and notebook chips certainly help gross margin because these chips carry higher price tag.

INTC management said the higher demand was across the board. Inventories which have been another area of concerns should decline as expected. Gross margins were helped by some accounting gimmicks, however higher demand does help margins.

Historical fourth quarter growth for INTC is 10.7%, so the new guidance of up 11% (at mid point of range) is in line with historical growth. Is this real pick up in demand or is it is just relative because INTC expectations were tempered to begin with? Overall the PC market is tracking to seasonal sequential growth, nothing extraordinary and INTC it self has been little weaker than market due to inventory build up and draw downs. Last quarter INTC grew less than seasonality so this quarter could be just to make up for lost growth in Q3 or did they not ship enough in Q3 to help Q4? Questions remain on where the growth will come from in next twelve months and how the margins can be expanded in this environment. Which begs the question, if this demand is artificial, what happens to inventories in Q1 2005 with INTC utilizing its factories more to produce more? Do we go back to the cycle of over builds and draw downs next year? INTC certainly isn’t going to slow its factories down because that would hurt margins and they said utilization is bottoming. Is utilization bottoming because they do not use the older 200mm fabs and need to run a lot more units through the newer 300mm fabs to maintain the same margins?

Plain and simple INTC has too much capacity and not enough demand, it can play the inventory games for a while but sooner or later it will catch up and that’s when you don’t want to be holding INTC. With all these questions its tough to say all is well with INTC. Certainly the market will take semiconductor and most tech stocks higher tomorrow, but if you are not like many glorified day-traders (they call themselves Hedge Funds sometimes) then think about what could happen next not what has happened already.

P.S. If any of the somewhat-technical talk about fabs is too complicated for you, please feel free to ask questions.