Silicon Storage Shares Slump Following 4Q Warning

Shares of Silicon Storage Technology Inc. (SSTI) stumbled after the company cut its fourth-quarter revenue target, as competition and lower demand squeezed prices.

The Sunnyvale, Calif., maker of flash-memory chips used in computers and cellphones late Monday lowered its fourth-quarter revenue outlook to $102 million to $108 million from its October forecast of $120 million to $130 million.

In a statement, Silicon Storage blamed "lower-than-expected demand across all segments and decreasing average selling prices caused by industrywide oversupply and increased competition." As a result, the firm will take a $20 million to $25 million charge for excess inventory and to write down the value of some products.

Much of the excess inventory was likely in the eight-megabyte density-memory device, a source of much of the pricing pressure, said Piper Jaffray analyst Richard Shannon. That is likely where most of the charges will be taken as well.



Even excluding the inventory charge, fourth-quarter gross profit margin will likely come in at 18%, below Mr. Shannon's estimate of 26%, the analyst said in a research note. Silicon Storage had projected 28% to 32%.

"While we do not believe this level of pricing is healthy for the industry and is not likely to remain at this level in the long run, it is prudent to assume that the [average selling prices] are not likely to return to prior levels," he added.

Mr. Shannon, who doesn't own shares of the company, cut his investment rating on the stock to "market perform" from "outperform."

At about 11:25 a.m. EST on the Nasdaq Stock Market, shares of Silicon Storage were down $1.17, or 17%, at $5.84 on volume of 6.5 million shares. The daily average is 1.7 million.

Mr. Shannon said there remains some support in Silicon Storage's stock. The company's licensing business alone could be worth nearly $6 a share, indicating investors can buy into the products business for free.

Silicon Storage also projected a fourth-quarter net loss of 24 cents to 28 cents a share. The firm's October forecast was for earnings of 10 cents to 12 cents a share.

For the time being, investors will likely put Silicon Storage in "the penalty box until pricing and inventories are better understood," said Mr. Shannon.

Wachovia Securities analyst John Barton expects pricing pressure to continue in 2005 as the competitive environment persists.

Silicon Storage considers its among its competitors Advanced Micro Devices Inc. (AMD), Atmel Corp. (ATML), Intel Corp. (INTC) and STMicroelectronics NV ( STM). Also Monday, Taiwanese rival Macronix International Co. Ltd. (MXICY) cut its full-year expectations on losses from currency fluctuations and excess inventory.

In addition to the price declines, Mr. Barton said Silicon Storage should see less license revenue next year, further hurting gross margins.

Mr. Barton doesn't own shares in Silicon Storage, and his firm doesn't have an investment-banking relationship with the company.

-By Roger Cheng; Dow Jones Newswires; 201-938-5393; roger.cheng@dowjones.com


Dow Jones Newswires
12-21-04 1144ET

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