Agere Stung by 3G (Again)

One thing's for sure: This is the wrong time for Agere Systems Inc. (NYSE: AGR.A) officials to book a trip to Vegas.

The company earnings report today met analysts' expectations for its June quarter. But three major customers are reporting temporary -- and unrelated -- problems that will cut into revenues for the September quarter, and a fourth is rejiggering its inventory methods, creating a $10 million shortfall for Agere.

Much of the blame rests with 3G chipset sales, which are expected to drop all the way to zero this quarter. "We have forecasted no 3G chipset revenues, a decrease of approximately $40 million from our June results," CFO John Gamble told analysts during a conference call this morning.

Agere is predicting net losses between zero and 2 cents per share for the September quarter, shattering analysts' projections for profits of 2 cents per share in that quarter, according to Reuters Research.

Revenue projections were chopped as well. Analysts were expecting $535 million, but Agere now says it will report revenues between $420 million to $445 million.

The news dropped Agere's stock by more than 30 percent. Late in the day, shares traded at $1.20, down 55 cents. They had dipped as low as $1.14.

The 3G chipsets in question are a custom job for NEC Corp. (Nasdaq: NIPNY; Tokyo: 6701), which sells handsets for the Hutchison 3G Ltd. rollout. It's the second time this year that Agere has gotten headaches from this product. Last quarter's earnings got slapped when Hutchison's delays led to a drop in NEC phone shipments (see Agere Suffers Hutch Hiccup).

"There are clearly rollout issues and inventory issues with this particular customer and this particular product," said Agere CEO John Dickson.

He noted that Hutchison is making "happier noises" about 3G lately (see Hutch Denies 3G Exit). But that hasn't translated into a reliable revenue stream for Agere."Even if the end product is selling -- and we believe it is selling -- there's still substantial inventory in the pipeline which needs to be run out," Dickson said.

Oh, but the fun continues. Agere also expects a $10 million drop in 2.5G cellular chipset purchases from a Chinese customer, although officials believe that's a one-time adjustment. "It just seems to be an issue of executive changes in the corporation and a different view about what inventory they want to bring to the marketplace," Dickson said.

Adding even more to the September shortfall are temporary problems with two major storage customers. Agere isn't naming them, but officials did say it was the "10 percent" customers that were involved -- and Maxtor Corp. (NYSE: MXO) and Seagate Technology Inc. (NYSE: STX) were the only storage customers comprising at least 10 percent of Agere's business last quarter.

The company broke even for the quarter ending June 30, reporting net income of $2 million, which rounds off to zero cents per share, on revenues of $495 million. For the same quarter a year ago, Agere reported losses of $78 million, or 4 cents per share, on revenues of $456 million.

Dickson noted that Agere's reorganization, announced today with the earnings, has nothing to do with any of these problems. Formerly divided between "infrastructure" and "client" groups, Agere is now split into four groups:

— Craig Matsumoto, Senior Editor, Light Reading

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