Agere's Good Bad News
The news coming out of companies lately has been so horrid that even bad news is getting a positive response on Wall Street.
Today, Agere Systems (NYSE: AGR), formerly the micro-electronics division of Lucent Technologies Inc. (NYSE: LU), announced job cuts and reduced guidance, as the company continues to feel the effects of a telecom slowdown. But Wall Street barely blinked, sending the company’s stock up 0.67 (11.19%) to 6.66.
“The optical and communication IC sector has been getting shelled, the last three weeks,” says Jim Jungjohann, an analyst with CIBC World Markets. “The miss and additional cuts should come as no surprise.”
On a conference call with analysts and investors, John T. Dickson, president and CEO of Agere, and Mark T. Greenquist, executive vice president and CFO, explained a restructuring plan, which entails cutting another 4,000 jobs in addition to the 2,000 jobs the company cut back in April. They also said the company would be reducing its manufacturing output, primarily in its Pennsylvania and Florida facilities. And it plans to sell off its manufacturing plant in Madrid. The restructuring and job cuts are expected to cost the company up to $900 million in charges, $725 million of which will be realized in the June quarter.
In anticipation of its July 25 earnings call, the company lowered its revenue guidance to $920 million for the quarter from earlier expectations of $950 million.
“As we evaluate the market, we needed to resize the business in face of changing conditions,” said Dickson. “We believe the restructuring will enable us to adapt our business to the market without compromising our future competitiveness.”
The news didn’t seem to phase investors, as Agere’s stock price climbed throughout the day. Why such a counter-intuitive response?
There are several reasons. For one, the news wasn’t that bad, say analysts. The reduced guidance was only $30 million shy of the company’s expected $950 million in revenue, which is actually in line with some analysts expectations. Compare this with the pre-announcement bombshell that JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) dropped just a couple of weeks ago, which sent the company’s stock tumbling (see JDSU Warns of Another Shortfall). The company changed its guidance from $700 million to $600 million for the quarter. Other semiconductor companies like Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) and Vitesse Semiconductor Corp. (Nasdaq: VTSS) have also pre-announced large misses in expected revenue recently, which adversely affected their stock prices.
Secondly, investors actually like cutbacks that result in cost savings, say analysts. (It's not their jobs, after all.) And that is exactly what Agere announced. The 6,000 layoffs will take Agere’s workforce down to 12,500 employees and should save the company about $520 million, said Greenquist. The April cutbacks have already resulted in a $20 million to $30 million savings for the June quarter, he added. The full impact most likely won’t be realized until Q2 2002.
The last reason is that many investors expected bad news. In anticipation, investors have been shorting the stock for at least a week, says one hedge-fund manager. Now they are all buying the stock back to cover their trades.
“Everyone who shorted was correct on their call,” he says. “But what you’re left with now are tons of buyers, needing to buy to cover the short because they now have no reason to be there.”
A similar scenario has been playing out with PMC-Sierra Inc. (Nasdaq: PMCS), another semiconductor company. Investors were shorting the stock waiting for a pre-announcement, which came last night (see PMC-Sierra Lowers Outlook). Today the company’s stock is up 3.10 (10.63%) to 32.25.
As for the future, Dickson would not give specific guidance for the September quarter.
“We’re not flying blind, but we have very limited visibility from our customers, as they have limited visibility from theirs. I think it would be futile to give specific guidance right now.”
But he did comment on where he expects to see growth in the future. He sees strong growth in the metropolitan area network with sales in long-haul components becoming almost non-existent. While submarine components are still seeing healthy demand, he says he expects this to taper off as well.
Overall, analysts are upbeat about the news. Tim Anderson, an analyst with Salomon Smith Barney, issued a research note raising his earnings expectations on the company to a 1 cent per share loss for fiscal 2001, up from his previous projection of a 6 cent loss. For fiscal 2002, he expects to see an 11 cent profit, up from a 1 cent profit.
"A lot of the bad news was already built into the stock this morning,” says Anderson. “Wall Street likes it when you increase revenue, particularly in this environment.”
- Marguerite Reardon, Senior Editor, Light Reading