12:35pm EDT 16-Oct-98 Dain Rauscher Wessels (Gollamudi, Raj 612-313-1204) VTSS
VTSS: B-Agg; Fourth Quarter Solid; Business Momentum Strong; Maintain Rating
Dain Rauscher Wessels
A division of Dain Rauscher Incorporated
VITESSE SEMICONDUCTOR, INC.
NASDAQ: VTSS
BUY-AGGRESSIVE
PRICE TARGET: $35
October 16, 1998
Price: $24.50
52-Week Range: $35-$16
Year End: September
Fiscal Year EPS P/E
1998A $0.54 45.4
1999E $0.80 30.6
2000E $1.10 22.3
Cal. Year EPS P/E
1997A $0.36 68.1
1998E $0.61 40.2
1999E $0.87 28.2
Tr. 12 ROE: 15.35%
3-Yr. EPS Gr: 50%
Shares Out: 80.1 million
Book Value: $4.25
Market Cap: $1.96 billion
SEMICONDUCTOR TECHNOLOGY
Raj Gollamudi
rgollamudi@dainrauscher.com
(612) 313-1204
Katherine Egbert
kegbert@dainrauscher.com
(612) 313-1310
* Vitesse reported solid fiscal fourth-quarter results with revenue of $54.1
million and EPS of $0.21 ahead of our estimates of $53.0 million and EPS of
$0.20.
* Revenues grew 17% sequentially and booking grew a robust 10%. Business was
strong across all segments.
* The company is not seeing any slowdown in orders from its telecom and datacom
customers. ATE business is solid.
* We are raising our revenue estimate for 1999 to $275 million from $270 million
but lowering EPS to $0.80 from $0.85 on slightly higher expenses.
* We maintain our Buy-Aggressive rating on VTSS shares. Our 12-month price
target is $35 based on a 40x multiple of calendar 1999 EPS estimates of $0.87.
Fourth Quarter Solid; Business Momentum Strong; Maintain Buy-Aggressive Rating
Fourth Quarter Solid: Vitesse reported another solid quarter of revenues and
earnings with revenues of $54.1 million and EPS of $0.21. On a fully taxed basis
(35% rate), EPS was $0.17, $0.01 ahead of our $0.16 estimate. Revenues grew 75%
compared to one year ago and grew 17% sequentially and were roughly $1 million
ahead of our estimates. Bookings were also strong with bookings for the quarter
coming in at $63.5 million compared to bookings of $57.5 million in the third
quarter, an increase of more than 10%. Backlog increased again from roughly $92
million to more than $102 million. With this backlog, the company is completely
booked out for the December quarter and more than 50% of the March quarter is
already booked.
Strength Across All Market Segments: Business was strong across the major market
segments. Telecom accounted for 48% of revenues, or $26 million, datacom
accounted for 28%, or $15.1 million, and ATE was 22% of revenues, or $12.6
million. Communication business (telecom plus datacom) was more than 75% of
revenues and grew 19% sequentially and 80% year over year. Bookings for the
communications segment were roughly $51 million with a book to bill of 1.22.
Bookings for ATE were $13.5 million for a book to bill of 1.07. The ATE segment
is improving with strength in the high-end business offsetting weakness in older
products. The rollout of Rambus high-speed memories should drive additional
demand in the coming quarters as memory chip makers buy new testing gear to ramp
up production of high-speed Direct Rambus DRAM. For the entire fiscal year,
Datacom revenues were up 100%, telecom was up 57%, and ATE was up 88%. North
America accounted for a little more than 80% of revenues in the quarter, Europe
was 10% of revenues, Asia was just less than 10%.
Margins and Expenses: Gross margins improved to 61.2% from 60.6% in the third
quarter. We expect a steady improvement in gross margins in the coming quarters.
Operating margins were a solid 33.8% up from 32.4% in the previous quarter. We
expect steady growth in R&D and SG&A expenses as the company continues to invest
in development of new products. Cash increased by $12 million to $162.3
million. DSO decreased to 66 days from 68 days, and inventories decreased to 72
days from 74 days. Tax rate going forward is 35% compared to 20% in 1998.
Inventory turns for the quarter was at 5. Capital expenditure was $30 million.
Headcount increased to 590, up from the 443 level one year ago.
Estimates: We are raising our revenue estimate for fiscal 1999 to $275 million
from $270, a growth of 57%. We are lowering our EPS estimate to $0.80 from $0.85
due to more conservative gross margin assumptions and higher spending on R&D.
Our initial estimate for fiscal 2000 is $386 million in revenues and EPS of
$1.10-an increase of 41% in revenues and EPS growth of 38%.
Stock Opinion: Vitesse's strong fourth-quarter results highlight the robust
fundamentals and the solid demand for the company's products. We continue to
like the long-term outlook for Vitesse's business, which is being driven by the
increasing demand for capacity and higher bandwidth in the communications
marketplace. There is no evidence that the company is experiencing any slowdown
as a result of some of the weakness in the telecom segment. The ATE segment
should improve as the rollout of Rambus high-speed memories gets underway. We
maintain our Buy-Aggressive rating on Vitesse shares. Our 12-month price target
is now $35, based on a 40x multiple (a discount to the projected three-year EPS
growth rate of 50%), on our calendar 1999 EPS estimate of $0.87. |
