M-Systems Chief Tries to Quash Earnings Warning Rumors - TheStreet

M-Systems Flash Disk Pioneers (FLSH) is having a lousy day on the market today. The stock opened with an 8% dive that quickly moderated to 6%, but still.

The recent decline is largely due to rumors that the company is about to publish an earnings warning. CEO Dov Moran on the phone today didn¿t sound surprised when asked about market fears. But his answer was unambiguous: ¿If we thought a warning was necessary, we¿d release one. We do not think it is,¿ he stated.

The market for M-Systems¿ products has cooled down, Moran explains. Expectations have dimmed, but the company still feels comfortable with its predictions for the fourth quarter, although Moran was a little less clear-cut about 2001.

Analysts calculate that M-Systems' 2001 sales will reach $135 million, up from $92 million in 2000, or 47%, with a net of $17.7 million, or 60 cents a share. If it meets those forecasts, its current stock price extrapolates to a profit multiple of 25, hardly excessive for a firm growing by 50% a year.

Diminishing expectations

The problem is that a lot of people on the capital market aren¿t convinced M-Systems will meet the forecast. The market for nonPC Internet access appliances is looking pretty tarnished, compared with just a few months ago. A slowdown will derogate the public¿s willingness to part with hefty sums for luxury Internet access doohickeys.

M-Systems¿ customers include a long list of small firms that will have terrific trouble raising money on the capital market these days. They are already buying much less for inventory. Expectations are dropping, as Moran puts it.

Take

Terayon Communication Systems

(TERN)

, which makes modems for cable systems. Terayon is an M-Systems customer. Moran says Terayon hasn¿t even begun to place orders yet.

OK, but meanwhile Terayon stock has collapsed. M-Systems can¿t count on all its customers to keep buying up flash memories at the same pace. Companies making Internet systems for cars or household networking devices are suffocating, not placing megaorders for memories.

Remember though that in the end, the market for Internet access devices is just getting to its feet; and it is based on flash memories and M-Systems¿ DiskOnChip, which replaces hard disks with the company's proprietary operating system, is the leading embedded solution.

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