Rush to Disclose Customer Dispute Hits Semtech Stock
Corporate Focus
by Anthony Palazzo
An excess of caution may be hurting Semtech Corp., the Camarillo-based semiconductor manufacturer that’s lost 37 percent of its stock market value since a late August earnings warning and the disclosure of a dispute with a customer.
On Aug. 27, Semtech projected that sales in its third quarter, which ends in late October, will be flat to down 5 percent from the $52.1 million posted in the second quarter ended July 28. It also said earnings would likely come in at 14 cents per share, flat with the second quarter.
In order to meet this forecast, 47 percent of the third quarter’s business will have to consist of “turn orders” those that are received and shipped in the same quarter. That’s well above the recent rate of 32 to 34 percent. The uncertain outlook, coming in what is typically the strongest season for sales of power-management chips that Semtech makes in the personal computer, laptop, cell phone and testing equipment markets, was combined with the disclosure of a customer dispute over whether Semtech chips caused a failure in one of its products.
Semtech sold the customer only $550,000 of the chips altogether, but the customer claims it suffered damages of $42 million, and projected that they could reach $115 million. Beyond disclosing the dispute, Semtech hasn’t said much about it. It hasn’t identified the customer, but said it has tried to duplicate the problem, and its tests show the chip functions reliably.
Disclosing early
Before the recent crisis in investor confidence, this type of problem might not have been revealed at such an early stage, but later, when its impact on company finances was clearer.
“We are continuing to work cooperatively with the customer to resolve the dispute,” said Chairman and Chief Executive John D. Poe on the Aug. 27 conference call. “We disclosed this information out of an abundance of caution in the current environment, but we are not going to take any questions about it since discussions and testing are ongoing.”
A company spokesman declined to comment further on the dispute.
“It seems odd that for such a small item, the claim is such a big number,” said David Wu, a Wedbush Morgan Securities analyst. “Ultimately I don’t know who’s right and who’s wrong.”
Another analyst following Semtech, Rick Whittington of American Technology Research, said these types of disputes are usually settled out of court. While he’s not dismissing the problem, “I’ve never seen a jury or judge order or sustain a monetary damage claim like this particular one.”
Since the August announcements, Semtech shares have fallen to a recent price of $11.83 per share, from $18.92. There’s no question that industry woes, and the resulting weak earnings forecast, are a big part of the falling stock price. There is too much capacity in the markets Semtech competes in, Whittington said, and Semtech and its competitors, which include Linear Technology Corp., Maxim Integrated Products Inc. and Analog Devices Inc., have all seen falling sales for the past two years.
Weak holiday season
At the beginning of 2002, orders picked up as customers replenished depleted inventories. But the holiday season is shaping up to be a weak one for personal computer makers a big part of Semtech’s customer base. Before the August announcement, Semtech’s shares had already fallen by 47 percent since the end of 2001, mirroring its competitors.
Analyst Douglas K. Lee of Banc of America Securities downgraded Semtech on Aug. 27 to “market performer,” despite his admiration of the company. He wants to see some signs of stabilization before recommending the stock again. Lee notes that Semtech has gained market share steadily since 1995 (it continues to do so now, in key laptop and telecom power management markets), and has been expanding profit margins.
“It’s a very, very well run ship, it’s got good management,” Lee said. “Now you hit a bump in the road, and you combine that with, ‘Oh, by the way, one of our customers says we owe them $42 million.’ At some point the stock gets way oversold.”
