11:15am EDT 16-Oct-98 Montgomery Securities (C. Westmont 415 627-3160) VTSS
VTSS: Prototypical Solid Results: Communications Demand Unflagging
NATIONSBANC MONTGOMERY***NATIONSBANC MONTGOMERY***NATIONSBANC MONTGOMERY
VITESSE SEMICONDUCTOR INC* RATING: BUY
October 16, 1998 Semiconductors NASDAQ: VTSS
Clark R. Westmont, CFA (415) 627-3160 Research Brief
Kurt A. Lanzavecchia (415) 913-5723 DJIA: 8299
S&P 500: 1047
NMGSI: 95
Price: $24-7/16 FY Ends 9/30 1997A 1998A 1999E
52-Week Range: $37-15
Fully Diluted Shares O/S: 80.1 MM Q1 (dec) $0.08 $0.13 $0.18
Market Capitalization: $1957.4 MM Q2 (mar) 0.10 0.15 0.20
Avg. Daily Vol. (3 Mos.): 1,695,508 Q3 (jun) 0.12 0.18 0.21
Secular EPS Growth: 40% Q4 (sep) 0.13 0.21 0.23
CY1998E Revenues: $199.8 MM Fiscal Year $0.43 $0.67 $0.82
Market Cap./Revenues: 980% P/E 56.8 36.5 29.8
9/98 Total Debt: $0 MM P/E/G 142% 91% 75%
9/98 LTD/Total Cap.: 0% Prev. Est. $0.66
9/98 ROAE: 17.3% calendar year $0.48 $0.73 $0.88
9/98 Shareholders Eq.: $340.7 MM p/e 50.9 33.5 27.8
9/98 Book Value/Share: $4.25 p/e/g 127% 84% 70%
Dividend/Yield: none prev. est. 0.36 0.61
* NationsBanc Montgomery Securities LLC currently maintains a market in this
security..
Prototypical Solid Results; Communications Demand Unflagging
Vitesse reported September (4QF98) EPS of $0.21, $0.01 above our estimate
and the Street consensus of $0.20. The upside resulted mostly from higher than
expected communications chip revenue. Sales of $54.1 million rose 17%
sequentially and 75% from a year ago. The revenue upside was driven by strong
demand in communication applications and higher-than-expected output from the
company's new wafer fab in Colorado.
($Millions) 4Q98A 4Q97 %Chg. 4Q98E Variance
Sales $54.1 $30.8 75% $53.0 2.0%
Operating Income $18.2 $8.9 104% $17.5 4.3%
Pretax Income $20.5 $11.3 82% $20.0 2.6%
Net Income $16.5 $10.1 63% $15.8 4.6%
EPS $0.21 $0.13 60% $0.20 3.0%
Shares Outstanding (000) 80.1 79 2% 79.5 0.7%
Solid bookings growth: The book-to-bill was 1.17 and bookings grew 10%
sequentially. Visibility remains excellent as six-month backlog increased 11%
from last quarter to $102.5 million. The December quarter revenue target is
essentially fully covered by current backlog, as well as 60% of the target for
March. The company continues to see strength throughout all major product
lines, showing a positive book-to-bill in each product sector. The book-to-
bill ratio was 1.22 in communications applications and 1.07 in automated test
equipment. Bookings for telecommunications chips rose 20% from June.
With the current strength in bookings and high backlog visibility, Vitesse
is comfortable with guidance for 10% sequential revenue and bookings growth in
the December quarter. As expected, the company's tax rate is expected to
increase from 20% in fiscal 1998 (September-ending) to 35% starting in
December. Our estimates for fiscal 1999 are unchanged, with room for the
company to deliver characteristic upside to estimates going forward.
Summary of results
Strong growth in shipments during the quarter was led by sales into
SONET/SDH telecom applications (48% of total sales), which were up 19%
sequentially and 80% year-over-year. Sales into Fiber channel, ATM, and
Gigabit Ethernet markets (28%) continued to experience strong growth up 17%
sequentially and 118% year-over-year. Vitesse's ATE business continues to be
relatively healthy in the face of a weak market for ATE products. Sales into
the ATE market (22%) segment increased 10% sequentially and 79% year-over-year.
Lucent accounted for over 20% of revenue in the quarter and Schlumberger
accounted for just over 10%. Other significant customers were Ericsson,
Teradyne, and Alcatel, each accounting for 3 to 7% of revenue. Overall the top
20 to 25 customers accounted for 75 to 80% of revenue.
Sales in North America accounted for 80% of the total and grew in-line with
the overall business. Sales in Europe accounted for just over 10% of total
sales and grew slightly faster than the overall business. Sales in Europe are
expected to continue to outpace overall sales next quarter. Sales in Japan
were flat to down during the quarter but shipments strengthened towards the end
of the quarter leading management to expect stronger shipments in December.
Days sales outstanding decreased slightly from 68 to 66.
Progress continues to exceed expectations in Vitesse's new Colorado fab.
After just three quarters in production, the company reported that the fab is
currently running at 50% of installed capacity.
Management continues to be very optimistic regarding new product
development. The company is planning to ship a new high-capacity switching
product into high-end datacom and telecom applications by the second half of
calendar 1999. Vitesse is also sampling new ATM products done in CMOS. The
company's CMOS product initiative seems to be gaining commitment as Vitesse
reported that 30% of its design engineers were now engaged in CMOS product
development. Other new product initiatives include new more highly integrated
OC48 transmitters and receivers.
Investment conclusion: The stock has been under fire lately due to fears
of a slowdown in the telecom equipment sector. However, recent results from
TranSwitch, PMC-Sierra, AMCC and Vitesse suggest that demand for broadband
components remains healthy. The stock is currently trading significantly off
its 52-week high of over $37 per share, while business has continued to build.
We continue to rate the stock a BUY with a 12-month price target of $35. |
