In defense of SiRF: investors moan, attorneys gloat—and companies lose

GPS World, April, 2008 by Stephen Colwell

On February 11, GPS World's Navigate! e-news daily reported that a Pennsylvania law firm made SiRF Technology the object of a class-action lawsuit following the company's February 5 fourth-quarter earnings report. On February 14, we reported a second action. More than a dozen firms have now filed against SiRF. See The Business section, page 30, for details.

Should investors in high-tech stocks feel cheated of their profits because the share price had the gall to fall for once? Did they ever learn that risk is inherent in the market, and indeed in business generally?

The number of class-action suits targeting SiRF reminds me of Atlanta burning in Gone with the Wind. Why torch the city? Why not leave it standing and do some clean-up?

I find it interesting that no such suits have been filed against Garmin, whose stock price rose to a high of $125 per share in November and recently hit a low of $52 per share in February. Would it seem reasonable to assume that SiRF, who has supplied Garmin with the venerable SiRFstar III chipset, might also suffer when a major customer goes south so quickly?

Regardless of the outcome, the issues facing SiRF primarily revolve around its acquisition of Centrality Communications and matters related to the disclosure of material events.

Industry analysts now take the hindsight view that the Centrality purchase was a bad move, but comments were pretty positive when it took place. It made sense. Acquire new technological capabilities and expand your market share to the low end, while at the same time you control the higher end of the food chain. These market experts were also bullish on SiRF not only expanding its customer base but holding off competition that had been heating up for some time. The acquisition complimented SiRF's core capabilities.

Disclosure. I have never consulted with SiRF, and the last GPS company stock of any kind that I owned, I sold in 1989. You cannot be a consultant in the business when you own stock. In fact I do not own any stock at all. It has been tempting, but not at the price of forgoing impartiality.

Reading the filings, we find a range of accusations against the company, allegations of one flavor or another which the plaintiffs claim contributed to the poor financial results disclosed in the latest analyst conference call and fourth-quarter (Q4) results. Most of charges are boilerplate accusations found in almost all class-action suits of the same nature, and my comments reflect a personal opinion, which as you read will identify my disdain for these types of witch hunts.

Herein follows an abridged and compiled version based on a review of the various press releases of the law firms that have filed suit. My response follows an arrow under each allegation.

* SiRF failed to disclose adverse facts about the company's financial well-being, business relationships, and prospects.

** A public company, SiRF publishes its financials for the world to see. As to business relationships, SiRF has issued press releases for any major new order it has received, which have been quite a few over the years. What company would ever issue a statement saying "we just lost a customer?" It's up to the educated investors to follow the market, watch the competition, and call the investor relations person to inquire what's going on if they feel something adverse underway.

Prospects, on the other hand, are a closely guarded secret and should be held confidential to those employees responsible for securing them as customers. Leaks of potential prospects often hurt the company's ability to close the deal and alert competitors to try to steal the business away. I learned a long time ago, a deal is not done until the money hits your account.

* SiRF lacked sufficient orders to fulfill sales targets set by the company.

** Anyone who follows the market for GPS components understands the risk associated with GPS product manufacturers changing order volumes, delaying shipments based on a revised build volume, or changes in their own competitive landscape. Competition has hit SiRF very rapidly--like the perfect storm. Remember Broadcom buying Global Locate, NXP acquiring GloNav, or Atheros buying U-nav? Not to mention Texas Instruments moving into the space as well. All within a year. This creates confusion in the forecast process until you see how it will affect market share. SiRF had a bullseye painted on its back; it had demonstrated the size and potential of the market, and everyone wanted a piece of its action.

* Centrality Communications, Inc. and its system-on-chip product line would result in overall lower margins and would affect SiRF's current product line, which would lead to lower gross margins for existing SiRF products.

** As stated above, most knowledgeable analysts believed this was a good move at the time. I think what may have happened is that SiRF, perhaps wrongly, believed its high-end product would continue flourishing, giving it a nice product spread such as Garmin and TomTom enjoy. Also, again as mentioned above, SiRF was moving to acquire new chip technologies just like its competitors were, and in fact may have felt forced to do so as a defensive measure.