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Sirf Technology Is on the Ropes

Alexei Oreskovic

A bad first quarter just got a lot worse for Sirf Technology HoldingsSIRF.

And with the chipmaker jettisoning staff and shuttering offices in reaction to its deteriorating business, the pain does not look like it will dissipate anytime soon.

It's a tough outcome for Sirf, but not an entirely surprising one.

The San Jose, Calif., chipmaker is the leader in GPS chips, a technology that allows electronic devices to receive data from overhead satellites to determine geographic location. The technology is so much in vogue that the market has been flooded by new players, including redoubtable silicon firms like BroadcomBRCM and QualcommQCOM.

And with the potential of a recession continuing to dog the U.S. economy, Sirf's business, which is primarily tied to the portable navigation devices that serve up driving directions in automobiles, is looking particularly vulnerable.

"In a lot of other chip companies' cases you can argue there is an emerging market phenomenon that can offset weakness," says Collins Stewart analyst Ramesh Misra. "But GPS is very automobile-tied, and of course the bulk of that is North America and Europe at this point."

Collins Stewart makes a market in Sirf shares and expects to receive, or intends to seek, compensation for investment banking services in the next three months.

In February, Sirf began to feel the pressure, projecting first-quarter revenue of $71 million to $77 million -- a sequential drop of 23% to 29%, vs. the typical first-quarter fall-off of 10% to 20%.

Now the company projects revenue will fall as much as 38% to 40% in the first quarter.

Having already missed first-quarter guidance by a wide margin in February, it's not reassuring that Sirf's management so misgauged how much more revenue downside remained in the quarter.

Shares of Sirf Technology plunged 27%, or $1.89, to $5.00 in midday trading Tuesday.

Sirf said Tuesday that it will layoff about 7% of its workforce, which totaled 753 employees as of Dec. 31, as well as shut down its offices in South San Francisco, Calif. and Stockholm, Sweden. The company also said it was killing a project to develop a mobile TV chip.

In a conference call with analysts Tuesday, company officials said the softness was more pronounced among customers considered second-tier PND makers, but acknowledged that the demand slowdown was felt across the board, including its tier one customers, which include companies like GarminGRMN.

Company executives were not very forthcoming on market-share shifts, although some observers believe Sirf may be lowering its prices to stave off existing and future competitors like Taiwan's Meditek.

"When you have Taiwanese competition, your days are numbered," says a technology analyst at a hedge fund who wished to remain anonymous.

And Sirf's efforts to branch out into cell phones has been frustrated by Motorola'sMOT fall from grace and the recent plans to put the handset business on the auction block. Analysts believe Motorola represented Sirf's most promising route to the cell phone, aside from its existing business with smartphone maker Research In MotionRIMM.

Sirf executives said Tuesday that the wireless business would begin to make a positive impact to financial results in the second half of 2008 thanks to certain design wins.

But the fact is that many of the new GPS competitors, such as Broadcom, are sharply focused on the cell phone market. Like many technology companies that rise to prominence on the back of a hot new technology, the business becomes much less viable once larger players decide they want a piece of the pie.

"If I was a manager at Sirf, I would have been looking for a sale a long time ago," said the hedge fund analyst.

And with GPS technology showing itself a popular acquisition in recent months, Tuesday's selloff makes Sirf even more ripe for a takeover than two months ago, when its shares lost half their value.

Asked about the potential of selling the company during Tuesday's conference call, CEO Micahel Canning tersely replied that Sirf's board has made it clear the company is not for sale.

With its stock trading at the lowest level in its four years as a public company, though, the board may not have the final say on the matter.