Centillium Continues Chip Carnage

Chalk up another earnings disappointment for the chips sector, as Centillium Communications Inc. lost more than one-fourth of its value today.

Everything seems to be going wrong at once, as Centillium handed analysts a lowered forecast during yesterday's earnings call. By late afternoon today, Centillium shares had fallen $0.79 (28.8 percent) to $1.95.

Centillium's drop continues a tough earnings season for comms chips, with one company after another reporting disappointing forecasts or continued troubles coming from stock-options investigations. (See Ikanos, Mindspeed Feel the Pain, PMC-Sierra Sinks on PON Outlook, and Vitesse Outlook Worsens – Even More.)

For its second quarter, which ended June 30, Centillium reported losses of $1.6 million, 4 cents per share, on revenues of $18.3 million, compared with losses of $313,000, 1 cent per share, on revenues of $20.3 million the previous quarter. (See Centillium Reports Q2.)

For its fourth quarter a year ago, Centillium reported losses of $3.7 million, 10 cents per share, on revenues of $18.7 million.

Centillium beat analysts' estimates, recording non-GAAP net losses of 2 cents per share compared with a forecast of 6 cents, according to Reuters Research . And its revenues of $18.3 million weren't far from the analysts's mark. But Centillium said sales will fall another 7 to 13 in its third quarter, which ends in September. That would mean revenues of $15.9 million to $17 million, well off the consensus estimate of $19 million.

Stacked inside the new forecast are multiple factors that spell a gloomy picture for Centillium, at least in the short term.

ADSL chip sales to Japan "really fell off a cliff in the June quarter," says Michael Coady, an analyst with B. Riley & Co. Inc. Those sales totaled $8.4 million, down 30 percent from the previous quarter, and will drop again in the third quarter, Centillium said. (On the plus side, DSL chip sales outside Japan grew 6 percent sequentially, to $4.9 million.)

Then there were VOIP chips, which did well -- but that was because of a spike in Samsung Corp. demand that won't be repeated in the third quarter, Centillium said.

Centillium could also be feeling some fallout from a recent Lucent Technologies Inc. (NYSE: LU) development. AT&T Inc. (NYSE: T) had picked Lucent gear -- containing Centillium chips -- for an IP Multimedia Subsystem (IMS) deployment but reportedly has begun testing other vendors's equipment because Lucent's can't do dualmode calling. (See Lucent Having Dualmode Difficulty?.) It's not Centillium's fault, but the delays in Lucent shipments translate into slowed sales for the chip vendor.

New products are on the way to beef up revenues, but they'll take a while to contribute. Coady has high hopes for a VDSL2 chipset, but that's yet to begin shipping. Centillium has gotten a foot in the door with PON in Japan and could be part of an NTT Communications Corp. (NYSE: NTT) deployment, but that won't bring in revenues until 2007. (See Centillium Pushes VDSL and Centillium Intros PON Chips.)

Unfortunately, Centillium's new markets appear to "have gross margins decidedly lower than their ADSL sales into Japan," says Tim Kellis, an analyst with Stanford Financial Group . Gross margins of 57 percent in Centillium's first quarter are likely to tumble to 50 percent in the third quarter, the company said.

With today's falloff, Centillium's valuation falls to roughly $80 million -- pretty close to its cash level of $64 million. So one bright spot, Kellis notes, is that the stock isn't likely to fall much further. Moreover, Centillium's cash was actually up $800,000 from the previous quarter.

— Craig Matsumoto, Senior Editor, Light Reading