Synaptics (SYNA) down $2 pre-opening

Touchpads for PCs were about 1% light relative to consensus revenue estimates, offset by higher mobile touchpads. On the conference call, Synaptics gave lower gross margin guidance relative to consensus. They said they'd decline slightly to 40%. The street is at 41%. The reason cited was new program implementations (mobile phone touch pads) that presently carry higher costs. Operating expenses were also guided a little higher due to increased legal expenses. Lastly, 1/3 of their $150mm cash is trapped in the auction rate securities market... which I view as non-operational and not a reason to sell as long as it doesn't impact their ability to do their core business.

I like it on weakness but I'm so glad I've been telling you to sell at $34.

Rackable (RACK) ... a little more color

So Rackable revenues were abysmal. 81mm estimate, comes in at 68mm. Ridiculous. Guide to 68-72mm with street at 88mm. Awful!

But... gross margins were an absolute blowout, coming in at 23.5 - 24.0% depending on whether you're using GAAP or non-GAAP. Estimates were for 16%. That's obviously gigantic. The company must have made a decision to walk away from some unprofitable business. The stock gets no credit for its price to revenue valuation (it trades at under 1* that metric and can't be valued on that. The book value is 70% of the share price. The revenue bar is coming in so much but they're still guiding to 350mm in sales for the year. Just for perspective, 67+72 (the revs they put up and guided to) get you to 139mm. So they're saying the second half of the year will be over 200mm? Margin guidance is going to be key here as they're telegraphing an awful lot of growth.

I wonder if this stock couldn't work after all.

Syna (SYNA) short interest is 30% of float

I have 7.5 mil of 24.5 mil outstanding. That's a lot of guys who want to buy the stock if it comes in.

5:48pm: Auction rate securities concerns are dogging the shares after-hours.

Western Digital Q3:2008 Results

Revenues come in about 50mm better at 2.11 bil. EPS blow out at $1.23 with street closer to $1.10 on a gross margin upside of 22.6% relative to consensus of 21.9%

No guidance in the release. Reading it, they think they're in a totally different market from Seagate. The street has a big down quarter modeled in the wake of Seagate... and they're a little arrogant. I kind of think the guidance is going to be better than the models for next Q. We'll see.

Synaptics (SYNA) 3Q:2008 Results

Co beats on the top line by a small amount, hits the EPS estimate ex an auction rate securities charge.

Guidance of 90-95mm is above street's 87mm estimate. Guidance for the following quarter of 8-14% suggests range of 97-108mm with street at 101mm.

Big short interest here. $34 could easily become support in a higher chart.

Microsoft (MSFT) 3Q:2008 Results

Reports slightly light on the top line. Guides Q4 to a 15.5 - 15.9 bil range, operating income of $5.8 - 6.2 bil, EPS of .45 - .48

So low end of revenue guidance puts company at consensus estimates. Operating income estimates are for $6.2 bil, and EPS consensus is .48, which are both at the high end of their guidance ranges. They're telling us margins are under pressure. Vista up-sell weaker than expected?

Something isn't right here. Glad I made the sale. More after the call.

Rackable (RACK) far worse

Revenues are far below expectations but profits are better. I'm surprised revenue guidance is staying where it is for the full year with the guidance like it is.

That said, book value is close to $7 and they're not burning money. It shouldn't get crushed. It's hard to crush something thats trading for less than its worth.

Earnings preview – MSFT, VSEA, SYNA, RACK, WDC

 

Sorry this is kinda late in the day. I had some personal things to take care of so I've been out. That also means this will be somewhat brief and more touchy feely than usual, if you can believe that.

 

Microsoft (MSFT)

Why is this stock so strong? Because Intel didn't blow up?

Expect Microsoft to be dogged somewhat on the call. Expect questions about the sustainability of xbox momentum ex-Haloesque titles – platform sales have been slowing in particular for Microsoft as Nintendo and Sony gobble up share around their early lead.

Do you have to Yahoo, guys? Really?

Will Vista ever work right?

I was long this till I read my piece. Funny.

 

Varian Semiconductor (VSEA), KLA Tencor (KLAC)

Lots of memory. Lam is up $2 on terrible numbers so we're temporarily in look-through mode. Uninvestable for the time being.

 

Synaptics (SYNA)

Notebooks okay… maybe even good based on volumes. iPod was probably a disaster in the quarter but will start to grow again. Further traction in smartphone touchscreens a positive. I'm long from $26ish and I sold half 5 minutes ago at $33.18 – blind on the quarter. I have no edge, I bought it on a value dislocation after their blow-up.

 

Rackable Systems (RACK)

Canacord Adams said they made #s and had enough detail on specific product traction that I would assume he knows something. Dot com spend still robust. Price competition still rough. Think they guided very conservatively last quarter and this was a beat and raise company for a long time – maybe it can be again. Long it from $8ish and staying with it.

 

Western Digital (WDC)

Better than Seagate. Margins will be stronger. Seagate said they didn't trash pricing at end of quarter – I think they lied. I don't think WDC had to stuff in the same way to make numbers. That said, hard drive channel inventories are running above historical norms and they should probably take the bar down. If they don't and it rallies, I'm a seller. I generally have been positive on this stock in the mid to high 20s and negative in the mid 30s. If anything, the story has deteriorated. It's still cheap if you believe the earnings estimates. I'm starting to lose faith.

 

 

 

 

 

Did anything change at Apple?

Apple beat revenues by a wide margin and guided next quarter's revenues to in-line with the street. They had a gross margin miss relative to the consensus but not their guidance. The main drivers of the story are unchanged -- Mac market share gains and the 3G iPhone shipping in June.

The margin "miss" in the current quarter was driven by much lower sequential sales in operating systems -- 170mm in Leopard revenue last quarter became 40mm this quarter. Honestly, I'm amazed they get away with that. If I were a Mac user, I'd be so angry that I had to buy an annual software update. But they get away with it.

I also believe that Apple did not buy much NAND in the March quarter and iPods sold reflected earlier and higher component prices. NAND prices were lower than the prior quarter but not low relative to current NAND pricing. Apple's tepid margin guidance may reflect a larger storage iPod refresh coming that will offset the component cost declines they're enjoying due to lowered NAND prices. NAND pricing has gotten even more favorable for them and iPods are stagnant. As iPods have become so ubiquitous among consumers, the line is dependent on increased features to drive replacements and new units. iPods have fixed pricing and Apple wants to hold pricing if at all possible. It is likely they will double storage in the next refresh of the line -- they already did it at the high end of the NAND portfolio (the iTouch and iPhone). It's not hard to see it coming in the Nano too. This could explain the weaker margin guidance relative to models. iPods represent a decent chunk of revenue -- 10.6 mil at an average selling price of $171 gets you to 1.8 bil (24%) of 7.5 bil total. If they choose not to refresh the iPod line, they'll likely start to show declining iPod revenue... and no one wants to see that.

Apple gets substantial kickbacks from AT&T for the iPhone and analysts were excited about the deferred revenue component. This will help bolster gross margins as the iPhone base builds -- it flows through over the life of contracts and is essentially pure profit. iPhones have a high cost up front for Apple in that they recognize all the cost of goods on the sale of the phone but they reap the benefits of that sale for 2 years afterward. In theory, they could sell the hardware at a loss and still recoup the phone's cost over the life of the AT&T contract. Obviously, it's better if they make money on both ends, which they do... they just make a better margin on the back-end.

This quarter may be a little dicey as the 3G iPhone won't ship until June, the enterprise connects to Microsoft Exchange won't ship till June, the iPod refresh won't happen until... well, who knows... and the Macbook enthusiasm likely fades somewhat as the ubergeeks already got theirs. However, September and December should be gangbusters.

I think you have to buy Apple on weakness. None of the main drivers are different or gone.

Lam Research (LRCX) Q4:2008 Results

Results were decent. Guidance is a horror show. They're guiding shipments down 15-25% to 490-530 mil. Revenue guidance of 535-565 mil is far below consensus of 615 mil. Gross margin guidance of 43% is down substantially -- admittedly, some of that is being blamed on the SEZ acquisition and they're suggesting its somewhat temporary in nature. GAAP EPS guidance of .32 - .42 is significantly below consensus of .88

Again, this is the realization quarter. It can get worse... but it's hard for it to accelerate worse.

Great management. Not good enough to offset 80% memory exposure.

Interestingly, they're still forecasting a NAND capex increase of 10% for this year. I wonder if that's too optimistic.

I'm short a bit. I hope I get to cover some at $37 tomorrow.