An Analysis of SiRF's 'Challenging Quarter'

On Thursday, SiRF Technology Holdings (SiRF) announced that it swung to a loss in the first quarter of 2008 due to a combination of seasonal demand, competitive pressures and the macroeconomic situation, especially in the PND space. The company also warned investors of a weak second quarter due to the softness in demand and high operational expenses.

In what was described as a ‘challenging quarter,’ SiRF reported $62mn in revenue at a gross profit of 48.9%. This is a 7.9% drop from the $67.3mn revenue that the company reported in Q1 of 2007. Its top-three customers contributed to 49% of its revenues. The margin is also a big drop from the 55% a year ago, and is a clear illustration of the pricing pressures that the company is experiencing.

SiRF also reported a GAAP net loss of $28mn or diluted net loss of $0.47 per share. The non-GAAP loss was $8.4mn or $0.14 per share. This is below the analyst consensus of $0.07 per share. A substantial part of the expenses ($7mn) came from its litigation expenses, mainly from its ITC litigation with Broadcom (BRCM). The company also has cash or cash equivalents of $121mn. An interesting conundrum thrown out during the earnings call was SiRF’s $13.5mn loan to a private GPS company. The company declined to provide further details on this.

The GPS leader also expects a weak second quarter due to continued economic weakness and competitive pressures. The company issued a guidance of $60-$62mn in revenue for the second quarter at a loss of $0.11-$0.16 per share. The gross margins are expected to be flat or lower. The company also expects the litigation expenses to be equally high next quarter.

Moving forward, the company is optimistic about its new products for PND and consumer electronics products for which it claims good traction. It acknowledged that wireless will be a bigger part of the revenue mix in the future. The design wins in this space are expected to make a revenue impact later this year. SiRF also stressed on the importance of its restructuring as a means to streamline its product development cycles and to bring spending in line with expectations. With the litigation expenses also tapering later this year, SiRF expects to break even in that time frame. The management is committed to ensure profitability beyond that time-frame.

SiRF’s PND product strategy is to rely on making a very affordable multifunctional PND with rich visualization experience. It expects its Prima multifunctional platform to penetrate next generation PNDs and mobile devices. Its competitive strategy is to ensure that it hires the “right kind of people” - good engineers who understand what they are doing. This, the company suggests, is another key reason behind the restructuring.

Banatao concluded that “fundamental opportunities in our market are in-tact in the long run.” GPS and location-based services will become more pervasive in the future. So, he is certainly right. While the company is confident that its product portfolio and its restructuring operation will position it to exploit this opportunity, it also acknowledges its competition. Companies like Atheros (ATHR), Broadcom and Qualcomm (QCOM) will likely pressurize SiRF further, which to-date has been a one-trick pony. At this juncture, it can only build benchmark products and hope to get design wins that will help it maintain its leadership position. Or, like I have said in my last two posts on SiRF (read more here and here), get acquired!

One thing that I noticed was that the executives were rather elusive about addressing questions on possible mergers or acquisitions, questions that repeatedly came up in various forms during the call. Asked if they would align with a bigger player to tackle the competitive pressure, the management answered that they will run the company with the restructuring-centered current strategy in mind. The execution of this business plan, Banatao said, was the best way to preserve the value for SiRF share-holders. My take from his answer: He did not even once reject an M&A possibility. It was rather a passive acknowedgement of this possibility. That my friends, is quite a real possibility!

Disclosure: The author is long SiRF, Qualcomm at the time of writing.

Comments

[asdf439]

SIRF is hardly a serious takeover-speculation target.

"One-trick pony" semiconductor companies,losing market share don't get acquired often. They have some cash on books,therefore the most like scenario is IMO a slow and steady decline over several years.