Zeev's Turnips Patch-No Politics (ZEEV)

[redwards]

by: duedillyo ,,,SNDK,,,
Long-Term Sentiment: Strong Sell 04/17/03 09:18 am
Msg: 46532 of 46614

...MY SNDK ANALYSIS - I AM SHORT THE STOCK AND WHAT FOLLOWS IS MY OPINION ONLY. IT IS NOT GUARANTEED TO BE RIGHT - DO YOUR OWN WORK.

While superficially a great quarter for them on the revenue line , there is lots of hair all over this thing-
1) there is a real chance of excess inventory in the channel, b/c digicam sales are down seasonally right now, this must be artificial. To have 29% of products go to OEM, up from 22% in prior Q, this is an increase from 35M to 45M in OEM sales, during what is normally a majorly DOWN seasonally after XMAS
2) ASP guidance of 10-15% down q/q is very aggressive...more likely is I think another quarter of down 25%. First off, why should we believe them when they failed to predict thsi Q at all accurately? It turned out down 24% and they guided for down only 10%-15%. Secondly, pricing was down very hard at the end of Q1, and Samsung pricing has continued down at a rate of 5% down a week for april so far. Therefore, the hangover from Q1 pricing, and what we have seen so far in Q2 pricing supports ASP declines much worse than 10-15% guided.
3) The key metric for this business is changing operating margin dollars- it went from $43M in Q4 to 35M in Q1, and guidance is for 24M in Q2...this is the key indicator of how business is getting worse and worse. They are simply hiding this falloff in operating margins by a) writing off a ton of stuff in Q4 b) using a bizarrely low tax rate going forward. Fundamentally, operating margin is a measure of the health of the business, and (even with royalty growth), and it has gone from 24% to 11% from 4Q02 to 2Q03.
4) Tax rate dropped to 10% from historic averages of 28% as they use up taxloss carryforwards, which they somewhat suspicously refused to quantify. They are telling us to use 10% tax rate going forward, but this can only last so long...for rough reference, they have lost a total of .85 EPS cumulatively recently, and by the end of june will have made that back on EPS...so im not sure that using 10% tax rate for the entire rest of the year is accurate.
5) Inventory continues to climb, as inventory at their customers looks like it increased by the same amoutn that their GM decreased by...i think it went from 118M to 126M at their customers, raising total inventory from 162M to 171M (all on a COGS basis), bringind days of inventory from 148 days to 151 days
6) COGS/MB dropped by 20%, they said partially off a shfit to MLC- considering that MLC was already at 50%, and they said will max out at around 65% of sales, this increased rate of COGS/MB drop is not sustainable. This is why their guidacne includes COGS/MB dropping in Q2 by only 5%.
7) If ASP decay is 25%, rather than the guided 10-15%, then taking in mind their guidance of 5% drop in COGS/MB, their GM will be 16% in Q2, and they will be at operating breakeven! This will lead to an EPS of $0.05, vs guided $0.30...I think they are setting themselves up for a HUGE miss in Q2...
8) All the talk of demand strength from cameraphones and USB drives has to talk inot account a) these are TINY end markets b) samsung is abosulely DUMPING dram capacity into NAND, and in Q3, fab 12a opens, dumping a bunch of 300mm wafers into the NAND supply
9) Adjusted for tax rate, etc. they really lowered guidance

In summary, while they did a) sell more than expected and b) lower COGS/MB more than expected, there is a LOT of hair all over the Q. It looks like there could be alot of inventory in the channel, they are still facing very stiff ASP declines (That they are not including in guidance), and their inventory is yet higher. Fundamentally this could be a ticking time bomb.