Oct. 07--Profit warnings by their nature come as surprises, but despite this, when I recommended going on warning alert last week, the last company I was concerned about was Ceva Inc. (Nasdaq:CEVA); LSE:CVA), which issued a warning and plunged 20 percent over the week. Ceva specializes in DSP solutions, that is, conversion of analog signals to digital and vice versa, and its big market for the coming years is the Chinese telecommunications market, particularly in smartphones and base stations infrastructure for 3G, and shortly for LTE.
Its business model whereby around 60 percent of its revenue is royalties on customers' sales in the previous quarter ought to give its management fairly good visibility when it provides quarterly guidance. It turns out that the slip-up this time was over the other 40 percent, that is, the amount of advance payments Ceva receives on new licensing agreements signed each quarter.
I wasn't worried about a warning because I knew that the company was just at the start of accelerated growth in the Chinese smartphones market, mainly through Chinese semiconductors company Spreadtrum (SPRD), growth that began this year after a long period of decline in both volumes and prices in the 2G telephones market.
Spreadtrum had a strong second quarter, which presumably had a substantial effect on the amount of royalties that Ceva received from it in the September quarter, but one big licensing agreement that was not signed on time wrecked Ceva's quarter. That is the fate of small companies like Ceva, reliant on a small number of customers, even if the market's long-term potential is huge.
On the substance of the matter, other than a dent in investor confidence that will weigh on the stock for a few quarters, I see no damage to Ceva's growth potential, and it is reasonable to assume that the contract in question will be signed soon. In addition, after the share price collapse, about half of Ceva's market cap is represented by net cash, which in my opinion will make its management accelerate share buybacks.
An important event taking place this week in the world of semiconductors is the release on Thursday of memory company Micron's (MU) results, which will have consequences for the results of SanDisk Corporation (Nasdaq:SNDK) in the coming quarter. The former's share price has risen by 191 percent so far this year, while the latter has made do with 45 percent. On the astonishing turnaround that this industry has made this year investment bank Nomura comments "Memory this recovery will be one to remember".
What is truly amazing is the turnaround at Micron in DRAM, which is not a market in which SanDisk is active. Micron will not want to remember 2012, because soon after its charismatic CEO Steven Appleton took a big, surprising gamble and bid for bankrupt Japanese DRAM company Elpida, he was killed when the plane he was piloting crashed.
His deputy, Mark Durcan, who was already out of the company, was asked to return and take up the leadership. Wisely, he did not withdraw from the acquisition of Elpida, which was then in a very bad state, but resolutely sought to close the deal quickly. This was despite the fact that DRAM prices at the time were at a low, and the Japanese yen was strong, making it very difficult for any Japanese manufacturer to compete, particularly in the tough computer memory market.
Two months ago, the Elpida deal was closed, and suddenly it became a dream deal for Micron. DRAM prices have risen by hundreds of percent in the past year because of a shortage and growing demand, and also thanks to a little luck: since September, prices have risen 35 percent because of a fire at the fab of a large competitor in China. In addition, and perhaps most importantly for the long term, the Japanese currency has dived by tens of percent this year, contributing significantly to every Japanese manufacturer, including Micron and SanDisk.
If at Micron, after a rise of 191 percent, expectations of its results are sky high, so that there's a risk of profit taking, even if it beats the estimates, in my view, SanDisk, although it is close to an annual high, is still traded well below its proper value. SanDisk reached its all-time peak, almost $80, in January 2006, on the back of the "iPod effect", when Steve Jobs discovered NAND as an ideal solution for portable storage.
At that time there were no iPhones or iPads, and certainly no-one then dreamed of the SSD market for computers and servers. Next year, according to the research companies, about 1.5 billion smartphones and tablets will be sold worldwide, and all will contain NAND solutions of one size or another. Therefore, in my opinion, SanDisk, as one of the leaders in this field, should sooner or later break through its early 2006 peak, especially as its net cash is at an all-time high.
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