JetBlue, Pixelworks down on earnings, but Cymer up; Schlumberger drops

By Rebecca Melvin

Princeton, N.J., Feb. 1 - The convertibles market was driven primarily by earnings news on Wednesday, with airlines dragged down by JetBlue Airways Corp.'s worse-than-expected quarterly loss and outlook, traders said.

Technology names as a group weren't affected by the weak earnings news of Google Inc., traders said. But the convertibles of Intel Corp. were flat to weaker, while Pixelworks Inc. lost three points amid an 18% slide in the underlying shares, and Flextronics lost early amid heavy volume of its shares changing hands: first lower, then into positive territory on a rebound by the close.

But Cymer Inc. improved after Prudential Equity Group raised its rating in response to the San Diego-based semiconductor manufacturing equipment company's reported earnings.

"Some people see Google as a bellwether but I really don't think it is. Yes, it's breakthrough technology, but it's a mess: you put in a search and get back a bunch of nonsense," a New York-based sellside analyst said.

The Intel 2.95% convertibles traded during the session at 90.5 versus $20.25, according to the same sellsider.

Prudential raised its rating on Cymer to "overweight" from "neutral weight" on the heels of the company's earning report posted late Tuesday.

Prudential said the upgrade reflected Cymer's continued strong growth, significant gross margins improvement, and Prudential's favorable view on the lithography sector.

Among energy names, Schlumberger Ltd. dropped as energy prices fell.

"We did a lot of energy today, a Connecticut-based sellside trader said. "It was down early, then rallied back. But it sold off here toward the end. Schlumberger took it on the chin."

Another sellsider in New York said his firm didn't trade much energy Wednesday, but it did trade the Schlumberger B tranche convertibles early at 166 versus a share price (NYSE: SLB) of $127.

Later the stock dropped four points and a separate trader said the convertible went out six points lower at 160. Schlumberger shares closed off $4.24, or 3.3%, to $123.20.

Huntsman Corp. continued to trade higher in a continuation of a move started Tuesday on news that the Salt Lake City-based chemical company is in talks with a firm that would take it private for $4.3 billion.

The Huntsman convertibles gained another three points to trade at 48.125 versus a share price (NYSE: HUN) of $23.30.

Ahead of earnings expected after the close, JDS Uniphase Corp. saw its 0% convertibles trade lower by about 0.75 point to 92, versus a closing share price (Nasdaq: JDSU) of $3.16, which actually bounced up four cents, or 1.28%, on the day, after trading lower initially.

After the close, the San Jose, Calif.-based optical network equipment maker posted a wider fiscal second-quarter loss, but higher revenue, which was line with expectations. But its shares fell in after-hours trade.

In the biotechnology sector, Isis Pharmaceuticals Inc. saw its stock and convertibles gain after the Carlsbad, Calif.-based drug maker said it has started human trials of a cancer drug, triggering a $750,000 payment from partner Eli Lilly & Co.

JetBlue creates downdraft

Both convertible issues of JetBlue were lower as its underlying shares (Nasdaq: JBLU) tumbled more than 14%.

The 3.75% convertibles came off more steeply than the shorter-dated 3.50% paper, which is putable in 2008. (The 3.75s aren't putable until 2010.)

On a hedged basis, both issues were said to have come in around the same amount, about 0.50 point, according to a Connecticut-based sellside firm.

The New York-based low-cost carrier posted its first loss, which was wider than expected, citing high fuel costs. The report was followed by downgrades of its shares by several firms including Calyon Securities.

The loss was JetBlue's first since going public in 2002. And the company forecast more of the same for the current first quarter and full-year 2006.

Its fourth-quarter net loss was $42.4 million, or 25 cents a share, compared with a net profit of $1.5 million, or 1 cent a share, a year earlier.

Excluding items, the airline lost 19 cents a share, compared with Wall Street estimates for a loss of 16 cents a share.

The company, which paid 50% more for jet fuel during the quarter, said it is looking to increase fares to help recoup costs. It paid an average price of $1.87 per gallon during the quarter, versus $1.24 per gallon a year ago.

"It's a real cliff hanger in regards to its credit. And the shorter-duration paper from a credit standpoint looks more favorable," a New York-based analyst said.

But the 3.5s still widened out, he said. "It has a 120% premium all of a sudden, which means less optionality."

The 3.5s due 2033 traded mostly at 89, holding steady at that level even as the underlying shares slid lower. The price represented an outright drop of about two or three points.

The 3.75% convertibles due 2035 traded at 96.25 versus a share price of $11.30, and later at 95.5, which was down about seven points on the day.

JetBlue shares closed down $1.86 to $11.18.

Weak earnings, outlook pressure Pixelworks

The 1.75% convertibles of Pixelworks traded down about three points as its shares (Nasdaq: PXLW) tumbled 18.23%.

The convertible paper changed hands at 66.68 versus a closing share price of $4.66, compared to 69.567 versus a share price of $5.699 on Tuesday, according to one sellside shop.

In a research note Wednesday, Thomas Weisel Partners said that the Tualatin, Ore.-based integrated circuits company reported December revenue of $43.3 million and a loss of $0.67 a share, which fell short of its own estimate of $47 million and a loss of $0.01 a share.

Management cited weaker than expected demand due to modest channel inventory issues in projectors and slow adoption in IP set-top boxes.

The company forecast March revenue at between $39 million to $43 million and non-GAAP gross margins in the range of 45.5% to 47.5%.

Thomas Weisel Partners said in its note that it modeled out gross margin at 43.5%, but said that the company's stronger gross margin guidance was due to a greater mix toward projector revenue and higher margin next generation TV products.

Inventory is a concern and a future write down is a possibility if product sales continue to fall below expectations, Thomas Weisel said. The company ended the quarter with $26.6 million in inventory

When reporting earnings, the company announced the resignation of its chief financial officer, Jeff Bouchard, and said chief operating officer Hans Olsen was named acting CFO until a permanent replacement can be found.

Thomas Weisel said that Bouchard left to take a CFO position at a private company in Silicon Valley.

On a positive note, Thomas Weisel said, "We are encouraged by the introductions of multiple designs that address the broad array of TV offerings; these products include Pearl, Opal 2, the next generation PWM series and Opal CRT." But it didn't expect these to materially affect performance before 2007.

Isis boosted by drug trial

The convertibles and stock of Isis Pharmaceuticals gained after it announced Wednesday that it has started human trials of a cancer drug, triggering a $750,000 payment from partner Eli Lilly & Co.

Lilly is funding the development of the drug, currently called LY2275796, and will make more payments to Isis if additional milestones are reached. The drug targets a protein associated with various cancers, including breast, head and neck, prostate, lung, bladder, colon, thyroid and non-Hodgkin's lymphomas.

Isis shares (Nasdaq: ISIS) added 21 cents on the day, or 3.88%, to $5.62 and its 5.5% convertible due 2009 climbed 3.375 points to 92.625, according to a convertible market source.

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