Price pressures cut SMC bottom line

Electronic News, March 24, 1997 by Gale Bradley

Hauppauge, N.Y.--Standard Microsystems Corp. (SMC), rather than be further run down by the aggressive network product price attrition that Intel set in motion when it began to seriously compete with 3Com, entered agreements with the microprocessor and soon-to-be networking giant, not the least of which is Intel's taking a 10 percent equity stake in SMC.

Still, SMC had to say at the same time it expects that the quarterly loss it will report next month will be greater than previously thought. Financial losses and staff cutbacks (EN, Feb. 10) have been the fallout of the Fast Ethernet card price war in recent months that, for SMC's bottom line was much further exacerbated by the output of Asian digital data separator device licensees sitting on too much semiconductor fabrication capacity.

Intel and SMC agreed to work cooperatively to integrate new semiconductor I/O ICs, which have been specifically designed to work with Intel's newer microprocessors and core logic chip sets, into selected Intel PC motherboard designs through the end of 1997. SMC expects to supply these I/O IC components to Intel's PC motherboard division, Intel's motherboard licensees and other global PC manufacturers.

With that promising prospect, the company expects to stay quite focused on I/O IC component supply, and therefore will not be aiming for new markets in the coming year.

"Certainly, we'll be coming out with new input/output devices, but in general we're going to work on expanding this segment and delivering to Intel and to Intel licensees. That's a very promising market," Paul Richman, SMC's chairman and CEO, said.

For the equity investment, Intel is to purchase just under 10 percent of SMC, buying about 1.54 million shares of the company's common stock directly from the company at a price of $9.50 per share. Intel will also receive warrants to purchase an additional 10 percent interest in SMC and certain anti-dilutive rights.

The warning that went out last week said SMC's 4Q97 revenues were about $62 million, an amount the company expects will put their net 4Q97 loss greater than had been expected at $17 to $18 million, or $1.22 to $1.29 per share. The February warning gauged the loss at $5.5 to $7 million, but the 3Com and Intel price cuts, affecting SMC's Systems Products division, came since that time.

For FY97, revenues were about $355 million. The net FY loss is expected to be between $18.8 to $19.8 million, or $1.36 to $1.44 per share. The company said the 4Q results reflect significantly lower revenues in both their Component Products division and their System Products division, compared to 4Q96, as well as compared to 3Q97. SMC cited the continued aggressive pricing environment for their I/O ICs from competitors in Asia.

It was said that because of the excess semiconductor manufacturing capacity in that area, some of these competitors, licensed by SMC under its patents, greatly reduced their prices on a number of so-called "pin-compatible" I/O devices, which SMC says are ICs that can "drop in" to sockets on PC motherboards as replacements for SMC's parts.

SMC believes that the pin-compatible I/O products marketed by some of the competitors violated the terms of their licensing agreements. The resolution of this issue, within the last two weeks, with two of the licensees should relieve some of the future pricing pressures, it was said.

SMC and Acer Laboratories, Inc. (ALI) of Taipei, Taiwan, settled their 1995 licensee contract dispute by amending it to say ALI was precluding from making the pin-compatible I/O devices (EN, March 17). Mr. Richman said he had settled a very similar dispute with another Asian vendor, but was bound not to identify which company that is.

For the System Products division, the lower revenues for the 4Q resulted from: severely lower market prices for Fast Ethernet products due to very aggressive price competition, a LAN industry-wide slowdown and decreased sales of older Ethernet products, compared with the 3Q, among other factors. The market is one Intel is openly and aggressively pursuing, with acquisitions and the price cuts that had 3Com return the favor.

During February, SMC said it, Intel, and 3Com reduced retail prices for Fast Ethernet adapters by up to 40 percent. SMC was forced to give price protection credits to its distributors to reflect the lower value of their Fast Ethernet and Ethernet adapter inventories in some cases.

An Intel spokesman said, "We have hundreds of companies we've invested in and there are two things behind them: investing in companies that can add value to the PC platform and our fairly significant supplier management program. This investment fits nicely into that criteria." SMC's staff cutbacks, "which the company does not have projections" of doing again, and the accrual for legal fees from this "difficult environment" decreased SMC's pre-tax earnings for the 4Q by about $2 million, it was said. The company expects to release its actual financial results for 4Q97 in April.

The Intel spokesman said, "As I said, we have hundreds of investments like this, not a lot of them made public. But in this case, it was a material event for a publicly-traded company."