Boss at Zarlink owner admits to some shivers

Peterson candid on weak results

James Peterson is one CEO who doesn’t beat around the bush. “Baby, it’s cold outside,” he told analysts last week as

Microsemi Corp. discussed weak December quarter results.

Too bad other company leaders are not as candid as Peterson in discussing how a weak global economy, the U.S. budget disputes and other problems are hitting results.

When the top and bottom line numbers are terrible, other chief executives find obscure numbers in the middle to make things look better. Not Peterson, or Jimmie P, as he signs his messages.

The California company, which bought Ottawa’s Zarlink in October 2011, missed analyst expectations for both sales and profits in the December quarter. Overall sales rose just 2.8 per cent to $247.6 million from a year earlier, but were down six per cent from the September quarter and are expected to fall another four to eight per cent in the March quarter. Communication, aerospace and industrial products experienced the biggest sequential declines while defence rose, swimming smartly against an industry trend.

“We are doing the things we should do,” Peterson said. Microsemi is cutting $6 million in sales, administration and research spending, with the research cuts still to come.

Candour has its limits. While Peterson told analysts “we did aggressively cut head count,” he wouldn’t say what that means for the Ottawa operation. It shed most of the old headquarter staff, cutting to about 100 employees following the takeover. Another 400 former Zarlink employees in Texas and Europe also likely felt some pain.

Peterson said his company is investing in the Zarlink communication and medical chip products. Based on the “positive contribution and work ethic,” he guessed that employment here is “simply flattish.”

How long it will stay flattish is another good guess. Microsemi, like many technology companies, is shifting operations quickly from North America to cheaper locations. For this year, Microsemi expects that the current weak quarter will be the trough for bad numbers and things will improve in the June quarter because sales bookings are improving.

Many companies desperately want investors to look beyond the next quarter or two in hopes the summer will start a turnaround. Integrated Device Technology (owner of the former Tundra), Sanmina (former Breconridge) and VMWare ( EMC) all surprised analysts with much weaker than expected forecasts for the March quarter. Even Roper Industries, a Florida diversified technology company whose stock kept rising to record levels seemingly immune to the weak economy, said sales growth, excluding recent acquisitions, will be “quite modest” in the first six months. One problem is an industrial and scientific camera division (including Lumenera of Ottawa) that declined 13 per cent in the last 12 months in the face of “terrific headwinds,” according to CEO Brian Jellison.

Ottawa’s biggest technology employer, IBM, which had 3,000 employees when it stopped disclosing local head count two years ago, served up better than expected news in the quarter with some undercurrents of concern. The giant continued to drive remarkable profit growth while overall sales remained flat. It is performing the feat by shifting jobs to lower-cost regions, driving growth of higher-profit segments, discarding weaker products and strategic acquisitions. Shares rose five per cent on the news.

It is also buying back stock in large quantities, which cheers the heart of mega-investor Warren Buffett and others. Through his Berkshire Hathaway investment vehicle, he bought $10.7 billion of stock in 2012 to emerge as one of the biggest single holders with a 5.4-per-cent stake.

But within the fourth-quarter numbers were reasons to pay attention.

Sales in Canada, for one, fell nine per cent compared to declines of just one per cent in the U.S. and three per cent in the huge Europe, Middle East and Africa market. IBM tried to soften the bad Canadian news, suggesting it suffered from weak comparisons with 13 per cent growth a year earlier.

IBM doesn’t always make comparisons easy. It highlighted a 13-per-cent rise in business analytics sales in the full fiscal year, adding that the Ottawa software labs are important contributors. But the quarterly results were less impressive, particularly in analytics software that excludes related services deals. A key information management software line, which includes the former Ottawa Cognos, grew at a modest three per cent. Rational software, another Ottawa contributor, did much better with sales up 12 per cent.

General Dynamics picked a good day to drop bad news. The giant, which is Ottawa’s biggest defence contractor employer, reported a huge loss on troubles in an information systems and technology division that includes most of the Ottawa shop. But because Apple reported weaker than expected profits and sales for its newest iPhone the same day, GD escaped investor scrutiny and its stock held up surprisingly well. New chief executive Phebe Novakovic said a string of acquisitions in the information division exposed “a somewhat broken” process and promised to fix it before any more deals. GD wrote off $2 billion in former assets — a figure an RBC analyst called “pretty eyewatering” — in the troubled division. Sales fell 12 per cent to $2.6 billion. Overall GD sales fell by a similar margin and it lost $2.13 billion compared to a profit of $603 million a year earlier. General Dynamics, like Lockheed Martin, its bigger competitor and an Ottawa peer, faces uncertain prospects because of cuts to defence spending in the U.S. and elsewhere. But it has deeper problems that will likely require more serious attention.

Open Text Corp., the Waterloo, Ont., business software company with Ottawa operations, also left investors scratching their heads. The December-ending quarter’s results looked good with sales up 9.6 per cent to $352 million and profits up a handsome 28 per cent, far ahead of analyst expectations.

But digging into the numbers, the results of new chief executive Mark Barrenechea’s first year were less than dazzling. The gains were driven almost exclusively by a $342-million deal for Easylink, a Georgia supplier, in July. Open Text now can deliver critical business information to clients from cloud computing networks — popular buzzwords that basically mean corporate customers get critical information much cheaper because they no longer have to pay for corporate computer networks and their highpriced keepers. Open Text staff in India and other low-cost locations are now delivering for customers like Coca-Cola and Toyota.

Without Easylink, Open Text had a bad quarter: software licence sales plunged 15 per cent to an alarming $76 million and the professional services that support this rich revenue stream took big hits. Barrenechea said the U.S. fiscal cliff and broader economy were factors. He is optimistic that software sales will pick up in the next six months but analysts are forecasting a decline this quarter in overall sales to about $345 million. Investors remain to be convinced. While the stock is up more than 30 per cent since October, it wobbled by five per cent on the news. International Datacasting Corp. said it has received more than $600,000 in orders for Superflex video content distributing gear and services from an undisclosed U.S. industry customer. Nordion has appointed Grant Gardner as senior vice-president and general counsel. He previously worked in legal affairs for RIM, Cognos and JDSU. Wi-LAN, the Ottawa patent enforcement company, said Alpha Networks signed a deal for undisclosed terms for digital television and display intellectual property used in network access and gateway products. Roaring Penguin Software said Orcom, the fourth biggest Internet services company in New Zealand, is buying CanIt email spam filtering software.