10:28am EDT 16-Oct-98 Credit Suisse First Boston (Glavin, Charles (415) 836-77
AM Call: VTSS: FY4Q99 Beats Consensus On Broad Strength - Part 1 FBC
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research-Americas
Industry: Semiconductors
Charlie Glavin, CFA 415/836-7715 charlie.glavin@csfb.com
Regina Crilly 415/836-7767 regina.crilly@csfb.com
STRONG BUY
Vitesse FY4Q99 Beats Consensus on Broad Strength (VTSS)
Summary
Vitesse reported FY4Q99 EPS of $0.21, beating our estimate and
consensus estimate of $0.20. Revenue of $54 million was
stronger than we expected, and a sequential increase of 17%
(up 67% over last year). Revenue strength occurred over all
three of VTSS' segments: Telecom (up 22% sequentially),
Datacom (up 15%), and ATE/Testing (up 9%). Gross margin
improved 60 basis points, reinforcing our belief that VTSS'
new Colorado fab is about one quarter ahead of its yield ramp.
Further revenue growth and margin expansion is expected, with
new designs and orders keeping visibility and backlog high.
EPS comparisons are tough due to a change in tax rates, higher
share count, and a drop in interest income (due to the recent
drop in interest rates). FY 1999 EPS estimate is unchanged at
$0.83, but our CY1999 estimate increased to $0.91 (formerly
$0.89). We maintain our STRONG BUY rating with a 12-month $35
price target.
Price Target Mkt.Value 52-Week
10/15/981 (12 Mo.) Div. Yield (MM) Price Range
24.438 $35 NA None $1,957.5
Annual Prev. Abs. Rel. EBITDA/
EPS EPS P/E P/E Share
9/99E $0.83 NA 29.4X 136% $1.25
9/98A $0.67 $0.66 36.5 162% $0.81
9/97A $0.43 NA 56.8 243% $0.38
Dec. March June Sept. FY End
1999E $0.18 $0.20 $0.21 $0.24 Sept.
1998A $0.13 $0.15 $0.18 $0.21A
1997A $0.08 $0.10 $0.12 $0.13
ROIC (9/98) NA
Total Debt (9/98) NM
Book Value/Share (9/98) $4.25
WACC (9/98) NA
Debt/Total Capital (9/98) NM
Common Shares 80.1
EP Trend2 NA
Est. 5-Yr. EPS Growth 40%
Est. 5-Yr. Div. Growth NA
1On 10/15/98 DJIA closed at 8299.4 and S&P 500 at 1047.5.
2Economic profit trend.
VTSS is a leading supplier of gallium arsenide ICs designed
mainly for fiber optic applications in three segments:
telecommunications (48% of FY98 revenue), datacom (27%), and
ATE/Testing (25%)
VTSS' FY4Q99 EPS of $0.21 beats consensus estimate of $0.20.
Gross margin improved to 61.2%, a 60 basis point sequential
improvement and 310 basis points higher than Q4FY97. We
believe the higher margins were attributable to the solid ramp
of VTSS' new 6" wafer fab in Colorado Springs and favorable
product mix (especially in new high-end OEM products). Going
forward, we expect gross margin to continue trending upward
toward the mid-62% range during FY1999 as VTSS continues to
benefit from improved yields and cost savings out of the
Colorado Springs fab, and as feature-rich, product design wins
accelerate.
All segments contributed to higher than expected revenue of
$54.1 million. Revenue of $54.1 million was $0.6 million
stronger than we expected, a sequential increase of 17% (up
67% over last year). Revenue strength occurred over all three
of VTSS segments: Telecom (up 22% sequentially), Datacom (up
15%), and ATE/Testing (up 9%). These product mix numbers were
in line with our expectations and feedback from our industry
sources. The strength of the ATE/Testing business is
particularly notable given the weakness that other Vitesse
competitors have indicated throughout the past several months.
We believe that VTSS' ATE/Testing will continue to grow a
realistic rate of 34% for FY1999; and certainly will not reach
the 100%+ year-over-year growth that it just achieved in
FY1998. In addition, beginning next quarter, VTSS will no
longer breakdown its communications business between telecom
and datacom, since the between and within OEMs/products has
blurred and is now too difficult to meaningfully distinguish.
New Colorado Spring fab appears to be one quarter ahead of
schedule. Based on the higher than expected gross margin, and
our discussions with VTSS customers and suppliers, we believe
the new fab is running about one quarter ahead of schedule.
Vitesse is in the midst of ramping the industry's first 6"
GaAs wafer fab in Colorado Springs to complement its existing
4" facility in Camarillo, CA. We believe the Colorado Springs
facility offers significant cost and revenue advantages for
VTSS as it migrates products from a 0.6-micron process
currently done on 4-inch wafers in Camarillo to the 0.35-
micron process being done on 6-inch wafer in Colorado. For
small PHY products (under 30K transistors) Colorado units
should be 50% less expensive, for medium size PHYs (75-100K
transistors) it should be a 67% cost savings, and for large
PHYs (over 500K transistors) costs should be roughly 75%
lower. Given these cost improvements, GaAs products out of
the Colorado Springs fab should be able to significantly
narrow the historical gap with silicon ICs on an absolute
cost basis. For certain product designs that are better
suited for a pure silicon CMOS process, VTSS uses IBM as a
foundry for its 0.35-micron designs. The new Colorado Springs
fab (which began shipping commercial products in 2Q98) is
expected to double VTSS's capacity by mid-1999; eventually
reaching 3x the output of the Camarillo fab (which runs at
about $40 million a quarter).
Furthermore, we believe that VTSS was able to secure and
qualify Freitag as an additional wafer supplier, in addition
to their supply arrangements with Litton Airtron and Hitachi.
This reinforces our belief that that VTSS will be able to
maintain its controlled capacity ramp while providing the
company with lower wafer costs and the means to meet strong
customer demand.
Strong growth assumptions supported by good visibility and new
design wins. Further revenue growth and margin expansion is
expected, with new designs and strong order growth continuing
to occur. Despite persistent fears about a global slowdown in
communications equipment, the demand for fiber optics, data
communications, and broadband transmission solutions does not
appear to have eased in general, and certainly not for VTSS
specifically. In addition, during the quarter, VTSS introduced
12 new products centered around the 2.5 Gbps integrated
chipset, with variations ranging from individual components or
the integration of those components such as multiplexers,
laser drivers, clock multipliers, and clock recovery units
using various protocols and voltages, including a 3.3 volt
variation. On the datacom side, they introduced a six new
products to improve the productivity of fiber channel and
Gigabit Ethernet systems. They recently sampled a new 64 x 65
switch technology product that operates at 2.5 Gb per port
(16x higher data rates per port than current alternatives)
that VTSS believes will be used in high-end communications
applications and could be an important revenue source going
into late FY99/early FY00.
While the Vitesse's book-to-bill did decline to 1.18 (as
expected), bookings growth was still strong in 4Q98. VTSS
backlog now stands at $102 million (up from approximately $92
million last quarter), or roughly 5-6 months, and is believed
to be of high quality.
Contrary to popular belief, VTSS' ATE business is still
robust. We believe VTSS' ATE/Testing business is not a "weak"
segment, but only suffers by comparison with the other two
product segments. The book-to-bill for ATE was 1.07, with a
comparable six months of backlog for test equipment. Most ATE
orders are for new products and include new OEM customers and
new market segment growth potential (especially in mixed-
signal testers). We believe business with Schlumberger and
Teradyne will continue to be strong growth drivers for VTSS'
Testing business and anticipate that segment to increase 30%+
in FY1999. During this quarter, Schlumberger represented 11%
of revenue in the quarter while Teradyne represented between 5-
7%. Guidance on ATE growth does not include any pick-up in
legacy tester equipment growth until late FY1999. If the need
for high speed testers (e.g., for PC-100 memory, 400 MHz and
higher processors, and mixed-signal tester) becomes a
bottleneck during FY1999, revenue from ATE could exceed $60
million in FY1999 -- which would be over 40% growth from the
$43 million in ATE revenue during FY1998. |
