Scientific-Atlanta sees demand slip for set-top boxes

Weekly Corporate Growth Report, Aug 27, 2001 by Rock, Justin

Scientific-Atlanta is a 50-year-- old company that has experienced amazing growth in the last three years. The firm makes digital set-top boxes and other high-tech equipment for digital cable television operators like AOL Time Warner Inc. and Charter Communications Inc.

These boxes enable the providers to offer sharper video and sound with a huge selection of channels. They also support a host of other interactive activities such as video-on-demand and Web surfing.

But the company's sales have stalled recently. Scientific-Atlanta reduced its sales and earnings forecast for the current quarter and its fiscal year endings June 30, 2002.

Scientific-Atlanta is facing what many high-tech firms have already run into: A skyrocketing growth rate that just ran out of fuel, at least for the short term. The company's primary customers, large digital cable television operators, are also seeing a slowed growth rate of new customers.

Some major cable companies have stated that the growth outlook looks decent for the rest of the year, but Scientific-Atlanta is faced with another short term problem. Many of these cable operators are sitting on significant excess of Scientific-- Atlanta's Explorer set-top boxes. In other words, the cable companies are not ordering new boxes, even in areas where installations are on the rise.

Last year, Scientific-Atlanta could not build set-top boxes fast enough to meet demand, and it built up manufacturing capacity five times in 18 months. Cable companies were even put on allocation for the devices, a move that contributed to the current bulky inventories of some customers. The firm was blind-sided by the economic slowdown, and now has to start laying off workers.

Scientific-Atlanta positioned itself to become the major supplier to the digital cable industry. It has sold other lines of business to focus on this industry. The firm competes with Motorola Inc.'s General Instruments division.

Digital set-top boxes accounted for 57 percent of sales for the fiscal year ended June 30, up from 34 percent in 2000 and 15 percent in 1999.

For the fiscal year 2001,

Scientific-Atlanta posted net income more than double to $333.7 million, from $155.8 million the year previous.

Recently, the company revoked its reduced outlook for the first quarter, replacing it with a big question mark. Wall Street hates uncertainty, and that is driving the firm's stock price down even further.

Even with Scientific-Atlanta's constant stock decline, some analysts feel the company may see the demand for set-top boxes turn around during its fiscal second quarter. This may be enough time for cable operators to use up excess inventories when seasonal demand for cable television increases in the fall.

Source: Wall Street Journal, Hoovers.com

By Justin Rock

Editor