Agere Systems (AGR)

[Bacchus_II]

Agere sets date for reverse split
Besides announcing 1-for-10 conversion, it posts quarterly loss.

By Jeanne Bonner
Of The Morning Call

Agere Systems will proceed with plans to combine its two classes of shares, and effect a 1-for-10 reverse stock split that will reduce the number of outstanding shares and boost the price of its flagging stock.

The Hanover Township, Lehigh County, chipmaker said Tuesday the two changes will most likely take place on May 27. Agere received overwhelming approval for the two moves from its shareholders at the company's annual meeting in February.

The company believes combining the shares will eliminate confusion among investors. Agere had its initial public offering in 2001 and spun off from Lucent Technologies in 2002. Lucent distributed too many shares in the IPO and put the tax-free nature of the spinoff in jeopardy. The solution was to create two classes of shares.

The reverse stock split, which will combine 10 shares into a single share, is aimed at boosting the stock price and reducing the number of outstanding shares. Using Agere's closing price of $1.22 on Tuesday, the company's shares would trade at $12.20 after the split took place.

The reverse stock split has been hailed by Wall Street analysts as a way to boost Agere's stock price so it will appeal to institutional investors, who already own the majority of the company's shares. Ross Seymore, an analyst with Deutsche Bank, said the unusually high number of shares that the Lucent spinoff foisted upon Agere has prevented the company's stock from reflecting its incremental steps toward profitability.

''With the reverse split, you'll have a stock price where you can see the earnings-per-share effect in a quarter,'' said Seymore, who has a ''hold'' rating on the stock. ''It cleans things up.''

Some critics, however, say the move is an artificial way to raise the stock price that would dilute holdings if the shares fell after the maneuver.

The decision to eliminate an extra class of shares and implement a reverse stock split may remove the last vestiges of the Lucent spinoff from Agere's corporate structure. It is hoped the split will bring Agere's stock price permanently above $5. Agere's stock fell 55 percent last year.

The reclassification of shares and the reverse split will leave Agere with about 181 million outstanding shares, down from a combined 1.8 billion now for the two classes. The company's stock symbol will be AGR.

The company announced the stock changes in conjunction with releasing second-quarter financial results. Agere reported a loss of $68 million on revenue of $417 million, which is on the high side of the range the company had forecast. Agere reported a profit of $74 million in the year-ago quarter that included a tax benefit of $79 million.

Agere is the world's 28th largest chip company. It makes chips for hard-disk drives and cell phones as well as telephone and computer networks. Its chips are used in Apple's iPod Mini music player and an array of Samsung cell phones.

The company forecasts revenue of between $415 million and $435 million for the quarter that will end June 30. It predicts net income of break-even to a loss of 2 cents per share, before the impact of the reverse split.

Revenue for the second quarter, which ended March 31, fell 10 percent from the year-ago quarter but was up slightly from the first quarter. The company began the year with the lowest quarterly revenue it has ever reported. Agere officials have said revenue and profitability will improve as the year progresses.

''I think their resolve is solid and their guidance is solid,'' said Ping Zhao, an analyst with CreditSights who has a ''buy'' rating on the stock.

Seymore of Deutsche Bank said Agere is becoming a smaller company and will end up with less revenue this year than in 2004. He has predicted annual revenue of between $1.6 billion and $1.7 billion for this year, compared with $1.91 billion last year. But Seymore said by becoming smaller, Agere will become profitable in the long run. Agere won't turn a full-year profit in fiscal 2005, the company has said.

''The challenge they are facing is transitioning from turnaround story to a growth story,'' said Seymore of Deutsche Bank, in a telephone interview. ''[As a company], I would rather be small and more profitable than larger and unprofitable and I think that's the trade they are making and I would applaud it.''

Agere's second-quarter net loss included $55 million in research and development charges that were part of its purchase of Modem-Art, an Israeli developer of cell phone chips, in February. The quarterly loss also includes $29 million in charges for additional depreciation, primarily related to its Orlando chip wafer plant, which the company plans to close later this year.

Agere reported $15 million in cash flow for the second quarter, the seventh consecutive quarter of positive cash flow. The company's pro forma loss for the quarter excluding one-time items was $1 million.

Agere officials said they are steadily gaining new customers and expanding beyond the company's traditionally small set of clients. Agere announced Sony Ericsson will use its dual-mode cell phone chips for a new PC card that consumers can insert into their computers to gain access to the Internet through cell phone networks. Because it provides access to a third generation, or 3G, cell phone network, the connection will be at broadband speed and will be more ubiquitous than Wi-Fi hot spots, whose ranges are limited, Agere officials said.

The company also said it has expanded its relationship with Western Digital, a maker of hard-disk drives. Previously, Agere sold preamplifier chips for Western Digital's hard-disk drives. Now it is also selling Western Digital systems-on-a-chip, which cost more and contain more Agere components. Chief Executive Officer John Dickson said the new business is bringing stability to Agere.

Three customers each accounted for 10 percent or more of Agere's revenue in the second quarter: hard-disk drive makers Maxtor and Seagate, and Samsung, which is the world's No. 3 cell phone maker. Agere has dramatically expanded its relationship with Samsung in the past two years and now supplies the Korean telecommunications giant with chips for cell phones, hard-disk drives and phone network infrastructure.

Agere is trying to build back its 3G cell phone business after its main client, NEC of Japan, began purchasing chips from other suppliers last year. NEC, for whom Agere developed a custom chip, continues to buy chips from Agere but in much smaller volumes.

As Agere's relationship with NEC has diminished, it has moved to developing a standard 3G chip. To boost its efforts, Agere acquired Modem-Art for $145 million in March. The 3G cell phone technology is specifically designed to provide features such as digital music, photo-sharing and streaming video that require a lot of bandwidth.

''I think what Modem-Art has given to us is an acceleration or enhancement of the capability we had, and for some of our customers it has also been a major sign of our commitment to that market,'' Dickson said. ''We see accelerated interest from our customers. Samsung is driving that very hard.''

Agere won't see revenue from the standard next-generation chips until later on this year.

Agere's sales in three out of its four product sectors declined from a year ago but rose from the December quarter. The unit that produces chips for telecommunication networks saw sales rise 14 percent from the December quarter and 3 percent from a year ago to $65 million.

''Sequentially, you saw growth,'' said Agere Chief Financial Officer John Gamble, in a telephone interview Tuesday. ''We went through difficult times last year during the summer. The job we have is to rebuild from where we are.''

The company's storage division, which produces chips for hard-disk drives and is the largest revenue generator, fell 10 percent from the December quarter and 12 percent from the year-ago quarter to $150 million in revenue.

The company has staked a claim in the emerging smaller hard drives that are used in consumer electronics. Dickson said Agere shipped 13 million chips for the 1-inch microdrives, more than half in the past two months. For now, the smaller drives remain a small part of its storage revenue.

Agere's decision to pursue a reverse stock split comes after receiving shareholder authorization twice to pursue the move. Agere decided not to effect the reverse split in its fiscal 2004 because it hoped to boost the stock price by revenue gains and profitability. Last year, the company faced uneven revenue from several major customers, including NEC, that took a toll on its stock price.

Gamble said the company chose to effect a 1-for-10 split rather than the other ratios — 1-for-20, 1-for-30 and 1-for-40 — because most of its peers have between 100 million and 400 million outstanding shares.

''So doing the 1-for-10 split and having 181 million shares outstanding — that seemed to be the right place to be,'' Gamble said.

He added, ''A double-digit stock price was perfectly reasonable. It was more important that the stock be liquid rather than to double the share price to $26.''

Holders of Agere's B shares will lose their extra voting rights when the two shares are combined. Corporate governance experts say Agere is making the right move in eliminating one class of shares. Companies that use a two-class share structure often want to concentrate control of the company among a particular group of investors.

May 31 will be the first day of trading for Agere's stock if the company completes the reverse stock split and the reclassification of shares on May 27.

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