Analysts cheer on VTSS's qtr result
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01:42am EDT 16-Oct-98 Needham & Co. (David Wong, Ph.D.) VTSS
4Q98: Strong Revenue Growth, Good Bookings
Needham & Company, Inc. 445 Park Avenue, New York, NY 10022
(212) 371-8300
Equity Research Morning Note David Wong, Ph.D. 212) 705-0314
October 15, 1998 dwong@needhamco.com
Ryl Ashley (212) 705-0406
Vitesse Semiconductor Corp. (OTC: VTSS)
4Q98: Strong Revenue Growth, Good Bookings
Price (10/15/98): 24.44 Shares Outstanding (mil): 73.2
52 Week Range: $37.18 - 15.81 Market Cap. (mil): 1,789
Recommendation/Target: Strong Buy/$48 Average Daily Volume (mil): 2.22
9/97A 9/98E 9/99E 9/00E
Old New Old New New
Revenue (MM) 104.9 175.0 No Change 290.0 279.0 410.0
Op'g Margin 27.3% 32.1% 32.4% 33.8% No change 35.8%
EPS: 1Q 0.08 0.13A 0.19 0.18 0.27
EPS: 2Q 0.10 0.15A 0.21 0.20 0.29
EPS: 3Q 0.12 0.18A 0.23 0.22 0.32
EPS: 4Q 0.13 0.20E 0.21A 0.25 0.24 0.34
EPS: Year 0.43 0.67E 0.67A 0.87 0.83 1.24
P/E Ratio 20.1 29.3
INVESTMENT OPINION
* We are reiterating our Strong Buy Rating on Vitesse. Our six to 12 month
price target is $48, a P/E of 39x our FY00 EPS estimate of $1.24.
* Revenues and earnings in 4Q98 were in line with our estimates. However we
are adjusting our FY99 revenue estimate from $290 million to $279 million and
our FY99 EPS estimate from $0.87 to $0.83. This brings our estimates closer to
consensus ($0.81). These new values represent FY99/FY98 revenue growth of 59%
and EPS growth of 53%.
HIGHLIGHTS
* 4Q98 revenues of $54.0 were in line with our $54.0 million estimate and grew
17% sequentially from 3Q98 revenues of $46 million. Telecom chip revenues grew
21% sequentially, datacom 16% and ATE 9%.
* EPS of $0.21 was slightly above our estimate of $0.20.
* Bookings in the quarter were strong at a book to bill of 1.17 overall, 1.22
for telecom products, 1.21 for datacom products and 1.07 for ATE.
* Six month backlog of $102.5 million is equivalent to about 5 months of
revenue. The next quarter (1Q99) is thus already fully booked and Vitesse
remains production limited.
* The company reported that it has had no indications of weakening in its
telecom end markets, contrary to fears in the investment community in recent
weaks. We believe that the high end OC-48 fiber optic markets that Vitesse
sells into have a much strong growth dynamic that older, copper based
equipment.Results as expected.
Table 1: Reported results vs our expectations for the quarter
We
Reported Expected Comments
Revenues ($MM) 54.1 54.0 Good predictability because of
EPS $0.21 $0.20 production limited business
Gross Margins 61.2% 61.0% environment
R&D ($MM) 8.5 8.6
SG&A ($MM) 6.3 6.6
Source : Company reports, Needham & Co. estimates
As shown in table 1, results for 4Q98 were in line with what we expected. We
believe that the production limited business environment created by the high
demand for Vitesse's products, and the company's excellent record of
manufacturing execution give Vitesse a lot of control over its financial
results. We have lowered our FY 99 revenue and EPS estimates slightly to bring
these closer to consensus numbers, in response to guidance from the company.
Revenues grew sequentially by about 17%, facilitated by the smooth ramp of the
new Colorado fab. The higher fab utilization resulted in higher gross margins,
up 1.2 percentage points from the prior quarter. We expect gross margins to
rise steadily as revenues grow.
Excellent revenue growth and bookings
Table 2: Revenue breakdown by product line
$Millions 2Q98 3Q98 Seq. Comments
Act. Act. growth
Telecom 21.4 26 21% Demand for OC-48 WDM products
Datacom 13 15.1 16% Growth in OC-12 and OC-48 ATM
ATE 11.6 12.6 9% High end mixed signal testers
Other 0.0 0.4
Total $46.0 $54.1 17%
Source : Company reports, Needham & Co. estimates.
Table 2 shows that the strongest revenue growth was in the telecom product
line. Despite recent concerns in the investment community concerning possible
weakening of telecom end markets, we believe that demand for high end optical
fiber systems remains strong and will continue to grow over the next few
quarters. Vitesse's telecom revenues, primarily for chips which go into OC-48
(2.5 Gb/s) systems), grew 21% sequentially with a strong book to bill of 1.22.
Lucent is Vitesse's largest telecom customer, accounting for about 23% of
total revenues in FY98. Ericsson and Alcatel are also important telecom
customers, each at between 3 and 7% of total revenues in FY98.
Datacom revenues grew 16% sequentially with a book to bill of 1.21. While
fibre channel accounts for about half the datacom revenues, we believe that ATM
and gigabit Ethernet were more important as growth drivers. Seagate is an
important datacom customer, but the company has a relatively broad base of
customers in datacom. With the recent increase in production capability, the
Vitesse is getting to a point where it might be able to expand revenues by
servicing second and third tier systems makers, whereas in the past the company
has had to work hard just to meet the needs of its top tier datacom customers.
ATE revenues also grew 9% sequentially with a book to bill of 1.07, despite
what we believe to be widespread weakness in the chip testing market. The
emergence of a need for high end memory testers in Rambus memory chips, and the
ramp of new, high end mixed signal testers were some factors Vitesse cited as
contributing to its ATE success in recent quarters. Schlumberger is an
important ATE customer at 11% of total revenues in FY98. Teradyne is another
significant customer at between 3 and 7% of revenues in FY98.
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