11:24am EDT 16-Oct-98 BancBoston Robertson Stephens (Moosa, Elias 415-693-3418)
VTSS: Delivers Solid Q4:F98 and FY98 Results. Accelerating Gro... (Page 1 of 2)
October 16, 1998
V I T E S S E S E M I C O N D U C T O R
Delivers Solid Q4:F98 and FY98 Results. Accelerating Growth In
Communications Covers Slowdown In Test.
Elias Moosa (415) 693-3418 elias_moosa@rsco.com
Mark Edelen (415) 248 4688 mark_edelen@rsco.com
BancBoston Robertson Stephens BancBoston Robertson Stephens
Vitesse Semiconductor VTSS $24.4 10/16/98
Industry: Semiconductor
CHANGE IN YES/NO WAS IS Elias Moosa (415) 693-3418
...Rating: No BUY Mark Edelen (415) 248-4688
...EPS 1998: Actual $0.54
...EPS 1999E Yes $0.80 $0.82 FYE: SEPT. 1998 1999E 2000E
...EPS 2000E No $1.02 EPS: 1Q $0.11 $0.18 $0.24
52-Week Range: $38-$15 2Q $0.12 $0.19 $0.25
Shares Outstanding (MM): 79.8 3Q $0.14 $0.21 $0.26
Market Cap: $1,951.3 4Q $0.17 $0.23 $0.27
Avg Daily Volume (000): 2,151.0 Year $0.54 $0.82 $1.02
9/98 Bk Value/Sh: $4.27 P/E 45.1x 29.9x 24.0x
9/98 Tot Debt/Tot Cap: 0% CY $0.61 $0.87 --
1998 ROAE: 18% CY P/E 39.8x 28.0x --
Price/Book Value: 5.7x Revs($M): 1998 1999E 2000E
9/98 Net Cash/Sh: $2.03 1Q $34.7 $60.0 $81.6
Dividend/Yield: 0.00% 2Q $40.2 $66.0 $86.5
3-Yr Sec Growth Rt: 30-35% 3Q $46.1 $72.5 $91.7
4Q $54.1 $78.5 $97.2
** EPS @ 35% Tax Rate: FY97=$0.36, FY98= Year $175.1 $277.0 $357.0
EqtyMktVl/Rev 11.1x 7.0x 5.5x
Key Points:
** Vitesse posted strong fourth quarter and FY98 results. Sales were up 17% Q-Q
to $54.1 million. EPS was $0.21, $0.01 better than our estimate.
** Bookings grew 10% Q-Q. Although revenues grew faster than bookings the book-
to-bill ratio, at 1.17 for the quarter, remains very strong. Notably, run-
rates suggest that double-digit order growth could be possible again this
quarter.
** Results, in our opinion, debunk concerns over telecom growth in Vitesse's
high-speed sectors, at least for now. Visibility remains exceptionally high
as 6-month backlog increases 10% to $102.5 million.
** Despite persistent sluggishness in semiconductor test markets, Vitesse's ATE
revenues grew 9% by targeting the high-speed sector. However, bookings have
decreased by 3% sequentially.
** Shipments from the new facility in Colorado Springs continue to increase,
exceeding $14M in Q4, and alleviate concerns that capacity is constraining
growth potential.
** We reiterate our Buy rating based on strength in fundamentals and continued
growth in high-speed telecom and datacom markets.
SUMMARY OF THE QUARTER: This quarter continued Vitesse's lengthy course of
sequential growth in revenues and EPS. Fourth quarter revenues were $54.1M -
An increase of 17.2% over Q3 and an impressive increase of 75.6% over Q4: 97.
This is $1.1M over our estimate. EPS were $0.21 for the quarter, an increase of
18.6% over Q3 and $0.01 over our estimate. Gross Margin was 61.2%, 60 basis
points over Q3 and 310 basis points over Q4: F97. Revenue growth was maintained
across all three-business groups: Telecom growth was 21% for the quarter,
datacom was 16% and ATE was 9%.
Figure 1: Breakdown of Q4:F98 results ($ in millions)
Sales % of Sales Q-Q Growth Book-to-Bill
Telecom $26 48% 22% 1.21
Datacom $15.1 28% 16% 1.21
ATE $12.6 23% 9% 1.21
Other $0.4 1% NA NA
Total $54.1 100% 17% 1.17
Source: Company reports and BRS estimates.
BALANCE SHEET: Vitesse's balance sheet continues to strengthen with an 8%
increase in the already buoyant cash balance. As further major capital
expenditures in the new Colorado Springs fab are not anticipated we expect the
balance sheet to continue to solidify. Note that DOI is continuing to fall
steadily and we believe this may indicate greater manufacturing efficiencies.
Figure 2: Key Balance Sheet Metrics
Q4:F96 Q1:F97 Q2:F97 Q3:F97 Q4:F97 Q1:F98 Q2:F98 Q3:F98 Q4:F98
Cash $52.4 $173.1 $177.6 $175.6 $155.8 $151.3 $144.3 $150.2 162.3
Q-Q Growth 4% 230% 3% -1% -11% -3% -5% 4% 8%
Accounts $18.4 $17.2 $18.6 $19.6 $20.9 $23.7 $28.8 $34.7 $39.7
Receivable
AR DSO 88 72 69 65 62 62 65 69 67
AR Q-Q Growth 21% -6% 8% 5% 7% 13% 22% 21% 14%
Inventory $10.0 $10.1 $10.2 $11.0 $11.8 $12.6 $13.5 $15.0 $16.8
DOI 101 93 86 84 83 81 77 75 73
Inventory Q-Q 1% 2% 1% 7% 7% 7% 7% 11% 12%
Growth
Source: Company Reports
CONTINUED GROWTH IN TELECOM: The results from Vitesse are significant as they
address concerns over growth in telecom and ATE markets. In the last quarter,
announcements from telecom equipment vendors including Alcatel and Nortel, have
suggested a slowing in revenue growth. This further suggested that operators
are starting to reduce system deployment rates. At the same time, Ciena
announced lost orders and the proposed merger of Tellabs and Ciena collapsed.
With this background the equities market has been sensitive to the impact the
telecom equipment market's turbulance may have on the revenues of the related
semiconductor vendors. Well, this quarter saw Vitesse's telecom growth at over
20% from the previous quarter. In our opinion, if there is slowing in telecom
equipment markets it is probably not in the high-speed areas targeted by
Vitesse whose telecom product line is almost entire 2.5Gb/s (OC-48) technology.
ATE REVENUES GROW IN SOFT MARKET, BUT BOOKINGS SLOW: The ATE industry has
also seen a slow down, as worldwide semiconductor capacity exceeds demands.
Again, Vitesse revenues in the ATE market grew as a result of sustained demand
for microprocessor testing equipment and the rapid emergence of a need for
testing Rambus products, a new high-speed memory IC technology. Once again,
Vitesse's strategy of targeting the niche but lucrative high-speed, high-
performance markets keeps the company clear of the commodity RAM test market
which is the primary victim of the the semiconductor slowdown. However, this
quarter saw a 3% decrease in bookings for ATE ICs and we may be seeing the test
market recession finally catch up with Vitesse. Vitesse's primary customers in
ATE are Schlumberger and Teradyne, both solid, high-end companies that
themselves ride over the turbulence of the large volume commodity test market.
In our opinion, Vitesse's close relationships with these vendors and the
continued demand for high-end testers will sustain Vitesse's revenues in ATE
for the next few quarters.
DATACOM GROWTH IS ROBUST: Vitesse's datacom business, which includes ICs used
in ATM, Gigabit Ethernet and Fibre Channel applications, continues to grow and
is now Vitesse's second largest business unit, after telecom. All these markets
are projected to grow significantly in the next two to three years and Vitesse
has good visibility.
NEW PRODUCTS MAINTAIN TECHNOLOGY LEADERSHIP: The last quarter saw Vitesse
release or start to sample a range of new products across all its markets.
Vitesse is rolling out a series of OC-48 devices that dramatically increase the
integration of key functions such as multiplexers, clock multipliers and laser
drivers. These products, in single ICs, do what today requires multiple ICs
and/or numerous discrete components. This greatly reduces the required circuit
board area for each transmission channel and helps decrease equipment costs.
These are key requirements of the rapidly emerging Dense Wavelength Division
Multiplexing (DWDM) market. Similarly, Vitesse is rolling out its OC-48 switch
product line. Already a 2x2 product is available and a 64x64 product is
sampling. These products are not expected to yield significant revenue in the
next twelve months as new teleco equipment design cycle works through, but
these products maintain Vitesse visibility in this market, and set the scene
for revenues in late 1999 and into 2000. Vitesse expansion into CMOS
technologies continues with new products that take Vitesse beyond the physical
layer and into adjacent framer functions. Significantly, these ICs require a
PHY chip from Vitesse or a competitor, adjacent to them in most designs.
Consequently, Vitesse is positioning itself for growth that complements its
growth in its traditional PHY markets.
VISIBILITY REMAINS STRONG: Vitesse has extended its backlog to $102.5. An
increase of 10% in the quarter and an increase of 65% over Q4 97. This growth
in backlog continues just as capacity constraints begin to ease. In our
opinion, concerns that backlog would roll-off as production freed up appear to
be unfounded, at least for now. With revenues growing at 17% while the backlog
is extending bodes well for a similarly successful year in 1999. Reportedly,
already the revenue plan for the December quarter is booked and a large portion
of the revenue plan for Q2 is in place.
Figure 3: Sequential Visibility Metrics
Q4:96 Q1:97 Q2:97 Q3:97 Q4:97 Q1:98 Q2:98 Q3:98 Q4:98
Book-to-Bill 1.18 1.22 1.21 1.25 1.27 1.25 1.29 1.25 1.17
Rev. Growth (Q-Q) 11% 14% 13% 12% 12% 12% 16% 15% 17%
Bookings Growth (Q-Q) 12% 18% 12% 16% 14% 11% 19% 12% 10%
Backlog Growth (Q-Q) 9% 11% 15% 15% 17% 14% 16% 14% 10%
Source: Company reports and BRS estimates.
IMPACT ON BUSINESS: The continued increase in revenues and backlog, even while
ATE bookings decrease, suggest that strength in the high-speed communications
market, and Vitesse's visibility in it, are comfortably sustaining Vitesse's
growth. We believe that concerns regarding a possible slowing in
telecommunications markets, at least in Vitesse's sector, are not valid --
although we watch trends in the telecommunications system deployment with great
interest. Vitesse has also shaken off concerns regarding capacity limitations,
as the new fab seems to be coming on-line successfully. The efficiencies, which
Vitesse may realize from this facility, through greater capacity and higher
yields, should continue to increase Vitesse's margins, in our opinion. We
expect revenue growth to continue with 10% increase quarter-to-quarter in Q1 of
F99, with 10-11% growth in subsequent quarters. Consequently, we forecast
revenues at $60M in Q1 F1999. We also expect gross margin to increase in the
second through fourth quarters of the year as the efficiencies of the new fab
continue to kick in. Our estimate for total revenues in 1999 is $277M, a growth
of 62% over 1998. We see gross margin increasing by 500 bps over the year,
leading to our EPS estimate of $0.82. We are introducing our F2000 estimate of
$1.02 on revenue of $357 million.
investors were coming out of their heads with fear about the telecom space.
While those fears appear to have been eased, the business environment certainly
appears robust for Vitesse. We believe that the resulting shakeout in multiples
has delivered an opportunity in Vitesse stock. With the stock trading at 28x
our C99 EPS estimate, we believe that VTSS will prove profitable for investors
at current levels. In our view, the risk in the stock is tied to a pronounced
recession in the U.S. markets, as the fundamental drivers of the technology
deployment by operators behind Vitesse's growth remain quite solid. We continue
to rate the stock a Buy.
Figure 4: Comparative Valuation
Ticker Price P/EC98 P/E C99 P/S P/BV Off High
Vitesse VTSS $24.44 39.8x 28.3x 11.1x 5.7x 34%
Galileo Technology GALTF $8.00 10.6x 7.3x 3.4x 2.0x 83%
PMC-Sierra PMCS $34.63 29.3x 25.6x 8.0x 11.4x 32%
Level One LEVL $21.78 24.3x 19.0x 3.9x 4.7x 34%
AMCC AMCC $18.31 25.4x 20.0x 5.0x 4.3x 39%
Transwitch TXCC $18.25 60.8x 29.0x 7.2x 9.1x 9%
MMC Networks MMCN $14.88 55.1x 30.4x 12.4x 8.3x 57%
Broadcom BRCM $70.00 107.7x 83.3x 28.6x 23.8x 22%
Average 44.1x 30.4x 10.3x 8.9x 39%
Source: AT Financial, Company Reports and BRS estimates
THE COMPANY: Vitesse is a leading supplier of digital Gallium Arsenide (GaAs)
semiconductor devices. Its products serve applications that require
performance beyond that available from CMOS technology. Vitesse has a growing
line of standard products, including telecom devices, datacom transceivers, and
ATE components.
INVESTMENT THESIS: Vitesse has mastered GaAs technology and has demonstrated
the ability to produce high quality, high yielding chips in production
quantities in very advanced technologies. We believe that the opportunities for
GaAs are solidifying and Vitesse is well positioned to participate in the
expansion of the market on a worldwide basis.
INVESTMENT RISKS: Among the risks are accelerating the development and
availability of reasonably priced GaAs standard products and timely expansion
of capacity at the company to support continued double-digit sequential revenue
growth rates. In addition, the need to maintain and increase yields at
Vitesse's new Colorado Springs fab remain critical to the company's growth.
Also among the risks is customer concentration, as the company's largest
customer made-up over 23% of revenues during F98. |
