10:27am EDT 16-Oct-98 Merrill Lynch (J.Osha/T.Kurlak) VTSS
VITESSE SEMICOND:Strong Results
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
VITESSE SEMICONDUCTOR CORP. (VTSS/OTC)
Strong Results
Joseph Osha (1) 212 449-0930
Thomas P. Kurlak (1) 212 449-2308
16 October 1998
ACCUMULATE*
Long Term
BUY
Reason for Report: Earnings Reported
Price: $24 7/16
Estimates (Sep) 1998A 1999E 2000E
EPS: $0.67 $0.75 $1.13
P/E: 36.5x 32.8x 21.6x
EPS Change (YoY): 11.5% 51.7%
Consensus EPS: $0.81
(First Call: 06-Oct-1998)
Q1 EPS (Dec): $0.13 $0.16
Cash Flow/Share: $0.83 $0.92 $1.30
Price/Cash Flow: 29.4x 26.6x 18.8x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-2-1-9
Mkt. Value / Shares Outstanding (mn): $1,955 / 80.1
Book Value/Share (Sep-1998): $4.25
Price/Book Ratio: 5.8x
ROE 1998E Average: 16.1%
LT Liability % of Capital: 8%
Est. 5 Year EPS Growth: 38.0%
Stock Data
52-Week Range: $37 3/16-$15 13/16
Symbol / Exchange: VTSS / OTC
Options: None
Institutional Ownership-Spectrum: 72.5%
Brokers Covering (First Call): 11
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: In Line (06-Apr-1998)
Income & Growth: In Line (06-Apr-1998)
Capital Appreciation: In Line (26-Aug-1997)
Market Analysis; Technical Rating: Above Average (25-Jul-1997)
*Intermediate term opinion last changed on 04-Jun-1998.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Revenues of $54.1 million and earnings of $0.21 per share were slightly
higher than our expectations.
o Our estimate for FY99 of $0.75 remains unchanged. We are initiating a
FY2000 estimate of $1.13.
o Our intermediate-term Accumulate and long-term Buy recommendations are
reiterated.
Fundamental Highlights:
o Performance across all three business areas was strong for Vitesse during
the quarter.
o Order visibility continues to be excellent, although comments regarding
the legacy business in automated test equipment were somewhat conservative.
o We believe that Vitesse's ATE business will weaken in the coming year.
However, we expect performance from the company's communications business to
continue to be excellent.
Revenues, earnings better than our expectations
Vitesse reported revenues and earnings for the September quarter that were
somewhat better than our expectations. Revenues of $54.1 million exceeded our
expectations of $52 million, while earnings per share of $0.21 exceeded our
estimate of $0.19. Stronger than expected performance at the gross margin
level was largely responsible for the upside to the profit number.
Results strong across all three business areas
Results were strong across all three of the company's business areas.
Telecommunications revenues, which in Vitesse's case consist mostly of products
used in Sonet/SDH systems, were up 62% YoY and 22% sequentially to $26 million.
Vitesse continues to do most of its telecom business into OC-48 or 2.5 gigabit
Sonet, which is the fastest implementation of Sonet currently in use. Vitesse
is still the dominant supplier in the market, although competitors such as AMCC
and Triquint are attempting to make inroads into Vitesse's position.
What Vitesse refers to as its data communications business actually consists of
several product areas, but the majority of sales are still going to fiber
channel applications. Some gigabit ethernet parts are being shipped as well
but revenues are still negligible. Total sales of $15.1 million were up 96%
YoY and 15% sequentially. Fiber channel products are available from a wide
variety of vendors, but as Vitesse reduces the cost of its GaAs parts the
company appears to be consolidating its position in the market.
Automated test equipment continues to perform well for Vitesse despite
widespread problems in the semiconductor capital equipment market. Revenues
for the quarter came in at $12.6 million, up 95% YoY and 9% sequentially. More
than half of revenues are still into the MPU test market, although the company
is starting to see greater presence in mixed-signal and high-speed memory
testers as well.
Current order visibility is excellent
Visibility for the company at the moment is excellent, with backlog standing at
$102.5 million and the book-to-bill for the quarter at 1.22. Comments
regarding the ATE business were somewhat more conservative than observations
about other areas, as the company noted that bookings for components sold into
older products were flat. However, overall bookings for ATE were $13.5
million, better than sales, as a result of demand for components to be used in
new products.
Company outlook for the upcoming year is optimistic
Overall, the company's outlook for the September 1999 fiscal year is quite
optimistic. CEO Lou Tomasetta commented that he sees no reason to believe that
Sonet/SDH component demand will decelerate from its current rate of growth, and
commented that he believes Vitesse can achieve 65% YoY growth for the combined
telecom/datacom business in 1999. The company's outlook for the ATE business
is more conservative at $55 million to $60 million, but still up from 1998's
figure.
We are more guarded with respect to the ATE business
Although we think that Vitesse will indeed perform quite well in 1999, we are
not quite as optimistic as Vitesse with regard to the company's ATE business.
Our combined telecom/datacom forecast of $226 million is at the high end of
what the company is suggesting, although we believe street estimates are higher
still. It is in ATE where we are more concerned - we have doubts as to whether
YoY growth will be possible in that business given the state of semiconductor
capital spending, even in Vitesse's core high-end microprocessor test market.
We are forecasting revenues of $33 million, down 25% YoY.
Our ATE estimate, in combination with our belief that a reduction in ATE
revenues could slightly impact margins, supports our current earnings forecast
of $0.75 per share. The rate of operating profit growth is substantially
higher than what is implied by the earnings per share figures - Vitesse's
effective tax rate is rising from 20% to 35%.
The stock price has already moved to reflect a more conservative outlook - our
accumulate recommendation is reiterated
Our estimate is lower than most consensus figures. However, we note that the
stock has declined substantially since its high of $37 3/16 earlier this year.
As if often the case, we think that the stock has moved ahead of the earnings
estimates, and reflects a 1999 earnings outlook closer to our own number than
to consensus figures.
On our estimate, Vitesse's stock is now trading on 33x 1999 earnings. We have
initiated a 2000 estimate of $1.13, and the stock is trading at 22x that
figure. The company has historically traded at between 30x and 40x earnings,
although it has dipped as low as 23x. Given the outlook for the Sonet and
datacom businesses, and Vitesse's position in those markets, we think the
valuation is attractive. We reiterate our Accumulate recommendation for the
intermediate term.
(VTSS) The securities of the company are not listed but trade over-the-counter
in the United States. In the US, retail sales and/or distribution of this
report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually
make a market in the securities of this company.
Opinion Key (X-a-b-c): Investment Risk Rating(X): A - Low, B - Average, C -
Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12
mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9
- No Cash Dividend. |
