SemiLEDs Delivers Another Disappointment

NEW YORK ( TheStreet) -- The big quarterly miss that's sending shares of LED sector niche player SemiLEDs ( LEDS) lower in Thursday's after-hours session shouldn't be a surprise to anyone.

SemiLEDs went public in December 2010 in an offer led by Bank of America Merrill Lynch, Barclays Capital and Jefferies. The offer priced above expectations at $17 per share and was over-subscribed, but since its IPO the Taiwan-based company has now fallen short in all three of its quarterly reports by wide margins, making it difficult to imagine what the fuss was about.

Thursday's adjusted loss of 16 cents a share for the company's fiscal third quarter was 150% worse than the average analysts' estimate of 6 cents a share, and its loss of 3 cents a share in its fiscal second quarter disappointed Wall Street expectations for a profit of 8 cents a share.

"I don't know too many IPOs that miss right off the bat and for consecutive quarters, that's a negative accomplishment," says Avian Securities LED analyst Andrew Abrams. "I looked at the filing when the company was first going public and my thought was 'It's so insignificant, why is it going public?' I asked guys in the LED sector who said, 'We never come up against them. They don't exist.' You can't blow the first few quarters right out of the gate and expect investors to come back to you."

Jefferies, one of the IPO's underwriters, had some trepidation ahead of Thursday's report, downgrading the stock to hold from buy and lowering its 12-month price target to $6 from $15. Of course, the firm did have that buy rating all the way through the stock's 80% year-to-date drop. The shares closed Thursday's regular session at $6.20, up 2%, but was last quoted at $5.42 in the extended session, down 78 cents, or 12.6%, on volume of almost 60,000.

SemiLEDs said its revenue came in at $5.6 million for the May-ended quarter, below the $6.3 million consensus view. It also said it sees a fiscal fourth-quarter loss of between 23 and 25 cents a share, much wider than the current average analysts' view for a loss of 2 cents a share.

"Our fiscal third quarter was challenging as pricing pressure and end demand weakness continued from the fiscal second quarter. However, we are seeing pricing stabilize," said Trung Doan, the company's chairman and CEO, in a press release.

SemiLEDs went public with two key "stories": it had a vertical chip structure enabling higher power LED components, a process that put it in the technology ranks of exclusive suppliers like Cree. Second, SemiLEDs had a sapphire reclamantion process - sapphire substrate is a raw material in LED production - which gave it a cost advantage.

The company also showed some eye-popping 2010 numbers in its pre-IPO days. SemiLEDs' net revenue grew 209.6% to $35.8 million in 2010, compared with a year earlier, according to the original IPO filing. In the filing the company reported gross profit increased significantly from $0.5 million for the year ended August 31, 2009 to $16.1 million for the year ended August 31, 2010. The company reported a gross margin increase from 4.6% for the year ended August 31, 2009 to 45.1% for the year ended August 31, 2010, "primarily due to improved capacity utilization as we operated at or near full capacity as a result of increased customer demand for our LED chips and LED components, a change in our product mix to higher margin products and improved production yields," it stated in the filing.

The story has changed considerably since then. SemiLEDs' GAAP gross margin clocked in at just 9% for its latest quarter, down from 51% a year ago. SemiLEDs also said it expects gross margin to be negative in the fourth quarter.

Whether the SemiLEDs results and outlook will have any impact on the wider LED sector isn't clear. Shares of Cree ( CREE) were down 2% in after-hours trading on Thursday, but Cree shares remain near a 52-week low and during regular trading on Thursday had gained 5%.

After its first earnings miss, the market still gave some credence to SemiLEDs as a potential read on the sector but it's debatable whether this latest poor performance will be seen as reflective of the group's fortunes or as evidence of the souring fortunes of an underperforming niche player. Avian's Abrams opts for the latter.

Ben Schuman, an analyst at Pacific Crest Securities said LED sector analysts and investors were listening to the call to get data points that could be a read-through for the sector as a whole. There were key points that could make Cree vulnerable to a pull back, even if the SemiLEDs missteps seem to be first and foremost company-specific issues. First, SemiLEDs mentioned that the Chinese street lighting market has been weak. This market is a key one for Cree, and has been one of the major issues for Cree in the previous quarterly misses. Second, SemiLEDs said pricing is stabilizing, which would be a positive sign amid a sea of negativity in the LED sapce. Pacific Crest's Schuman said he believes the read-through from SemiLEDs should be limited if trading were ruled by logic, and noted that the company's revenue base is 2% of Cree revenues.

"I never could understand what the excitement was about, in all honesty," he says. "Everyone in the industry that was a big player said they don't show up on a map of tertiary suppliers."

-- Written by Eric Rosenbaum from New York.

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