Following SigmaTel's 1Q06 earnings report (see full conference call transcript), Wedbush Morgan analysts Craig Berger and James Schneider sent a cautionary note to clients. Key excerpts:
* SigmaTel reported Q1 results in-line with its earlier pre-announcement, with Q2 revenue guidance of $40-46 million in line with our prior estimate of $42.6 million. Execution issues continue with management citing product transition challenges, a soft end market, and market share losses to low-end competitors as primary factors.
* With a Q1 cash balance of only $51 million and prospects for continued MP3 chip commoditization, we believe the company may need to issue debt or raise cash as soon as Q3 to maintain management's stated $30 million cash cushion target. Despite this, management plans to continue R&D spending increases until it gains more visibility into 2H'06 business.
* Market share losses to Actions Semi appear to continue with the STMP3600 unlikely to reverse this slide; audio codecs are a bright spot.
* Raising 2006 EPS estimate from ($1.80) to ($1.55) and 2007 EPS estimate from ($1.10) to ($1.05) on a tax accounting change, but maintaining $5 price target; reiterate SELL given the firm's secularly-challenged business prospects and declining balance sheet.