Investors were taken by surprise late last month when one of Orange County’s smaller but scrappy chipmakers fell short of expectations in its most recent quarter.
Newport Beach-based networking chipmaker Mindspeed Technologies Inc. didn’t meet forecasts when it posted smaller sales and a bigger loss than expected.
The culprit: a customer that scaled back buying during the period ended March 31.
Shares of the company fell more than 11% in the days following the April 24 earnings announcement. A downgrade by Daniel Amir, an analyst with W.R. Hambrecht & Co. in San Francisco, helped spur the stock decline. Amir cut his rating on Mindspeed shares to “hold” from “buy.”
The fear is that Mindspeed’s quarterly sales shortfall might signal problems in the coming quarters, just as competition in the chip market heats up.
But others, including company officials, said the quarterly miss was a temporary setback. They said Mindspeed is just one quarter away from posting a quarterly operating profit for the first time since being spun off from Newport Beach chipmaker Conexant Systems Inc. in 2003.
“The Mindspeed team made significant progress on a number of fronts,” said Chief Executive Raouf Halim, during a call with analysts and investors.
The company’s operating loss improved to $6.3 million from $18.2 million a year ago. Mindspeed’s adjusted loss, which doesn’t include stock compensation and amortization charges, narrowed to $4.3 million, though it fell short of analysts’ call for a $2.1 million loss.
Revenue climbed 30% to $34.6 million from a year earlier. Revenue was slightly less than a forecast for $35 million in quarterly sales.
The company disappointed investors with its outlook for the current quarter. The company reduced its previous sales guidance of $37 million to $36 million.
The good news: Mindspeed said it’s on track to post an operating profit in the current quarter. And it should post a net profit within two or three quarters, said company spokesman Tom Stites.
Those will be watershed moments for Mindspeed. The company has been mired in red ink since the Conexant spinoff.
Mindspeed makes chips that help run Internet-based phone networks, fiber optic networks and broadcast video products, among others.
The company hit a stumbling block in the middle of the March quarter when a big customer in North America, believed by some analysts to be San Jose-based Cisco Systems Inc., cut spending on Mindspeed’s Web-based phone chips.
The customer told Mindspeed that it had ordered up too many chips and needed to reduce its stockpile. Mindspeed said the customer likely won’t need more chips until at least the end of the current quarter. Sales of Mindspeed’s Web-based phone chips in the March quarter dropped 30% to $8.2 million from the December period.
“While the inventory issue is related to one major customer, we recommend investors take a cautious approach until we see further visibility with regards to the channel,” W.R. Hambrecht analyst Amir said in a report.
Meanwhile, Mindspeed has had trouble with its manufacturing partners. The company, which contracts with companies to produce its chips, can’t get them to keep up with the demand it’s seeing from Asian telecommunications customers.
“We know there are supply constraints and some (customers) are unhappy about that,” Halim said.
Amir said this was a bit of a surprise.
“We believe these issues could limit the company’s revenue and earnings growth in the second half of its fiscal year,” Amir said.
Despite these concerns, the stock has held up relatively well. Even with the recent declines, shares have more than doubled in the past year. Mindspeed counts a market value of about $365 million.
Jeff Loff, an analyst with Switzerland-based Credit Suisse Group, kept his “outperform” rating on the stock after the quarterly earnings release. He lowered his sales estimates.
Calling the quarter a “Mindspeed bump,” Loff said in a report that the problem was “isolated and temporary.”
“The underlying fundamentals remain intact,” he said.
Loff said demand for Web-based phone chips is healthy outside of the problem with the North American customer (Like Amir, Loff believes the customer is Cisco). The chips, also known as voice over Internet protocol chips, make up about 24% of Mindspeed’s sales.
Loff said the company’s contracts for its Web chips in the quarter were up 39% to 30 deals, versus the past quarter. One of the customers was a new and coveted one for Mindspeed: Sweden’s Telefonaktiebolaget LM Ericsson.
“It continues to see a healthy VoIP market,” Loff said.
Mindspeed’s other units posted gains in the period.
Its analog business, which includes switches and broadband network chips, grew 29% to $11 million from the previous quarter. The analog business makes up about a third of overall sales.
The company’s biggest unit is wide area network chips, accounting for 44% of total sales. Sales grew 29% in the March quarter from the previous quarter. Chip sales in the unit had declined 15% in the December quarter.
“As earnings leverage materializes, we expect the stock to look inexpensive,” Loff said.
