Here is Lehman's comments
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10:37am EST 15-Jan-98 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368,) ALSC
Alliance Semiconductor: Reported Fiscal 3Q98 EPS $-0.06
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* OPERATING EPS SLIGHTLY ABOVE TARGET; ESTIMATES EDGE UP; 2 MAINTAINED
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JANUARY 14 POST CLOSE ALSC REPORTED DECEMBER FY3Q98 EPS AT -$0.06 INCLUDING A
$0.10 INVENTORY CHARGE; OPERATING RESULTS SIGNIFICANTLY BETTER THAN TARGET.
Our $-0.04 estimate had included a $0.03 inventory write-down, so, excluding
write-downs, ALSC actually had a slight profit instead of a small loss.
Versus our targets, sales decreased 14% from September FY2Q98 or down
$2.2 million. (-8.1%) but EBITD was up $3.1 million. Most notably, gross
margin (GM) was 18.1% (excluding write-downs) versus our 7.4% target (each
margin point impacts quarterly EPS by less than half a cent). Operating
expense ratio at 33.1% was 0.5 points higher than target.
WE ATTRIBUTE THE IMPROVED GROSS MARGIN AND SMALL PROFIT TO TWO ITEMS:
(1) Shift in mix back toward SRAMs and (2) Graphics DRAMs. In SRAMs, ALSC has
been successful in geographically diversifying to serve tier 1 customers in
Europe, and overall SRAM pricing conditions are OK. SRAM gross margins have
moved up and we estimate they are now roughly in the 30% range. In DRAMs,
ALSC moved quickly early in the quarter to focus on 256K x 4 graphics parts
where pricing was surprisingly good. DRAM margins still likely are no more
than 10%.
MORE INVENTORY WRITE-DOWNS STILL A RISK, BUT EPS PROJECTIONS EDGE UP. We are
maintaining a very cautious stance on ALSC's near term EPS prospects.
We assume gross margin is stable in the upcoming quarter but declines again in
FY1Q99 before beginning a sustainable uptrend as startup operation in graphics
and flash turn more successful. Based on better gross margins, we now project
FY99 at $0.30 (old: $0.25) and continue to project FY00 at $0.75.
A BIG TEST: A BIG DROP IN INVENTORIES IN THE UPCOMING QUARTER. ALSC's $31
million inventory is about double where it should be and is little changed
despite $32 million in inventory write-downs during the past two years.
Discussions with management suggest inventories will be brought down by $10
million in the coming quarter. We would view that as a major positive: Clear
evidence of management controls and the end of a string of "one-time" charges.
2 MAINTAINED; AMONG OUR FAVORITE MEMORY STOCKS. It is tough to express
enthusiasm for memory stocks near term (we view the DRAM uptick of the past
week as a fluke; we do anticipate a sustainable pricing rally, but not now).
Still, ALSC has outstanding underlying value in its joint venture
partnerships, and we believe its core operations , despite the current absence
of earnings, also have value. Investors today are likely to give the just
completed quarter mixed reviews (nice operating results, but sometimes its
hard to express conviction in the operating results when one-time write-downs
keep recurring), and the stock is unlikely to move far on today's better than
anticipated results. But we think investors looking for exposure to a chip
stock with dramatic upside leverage and very little downside risk will
increasingly start to establish positions in ALSC as they see losses bottom.
WE CONTINUE TO SEE A $13 ONE-YEAR TARGET AS ATTAINABLE.
------12/31/96--- ----12/31/97-----------------------
ALSC FY3Q ----------------- --LB EST- --Actual---------- vs.
-$Mil.- --Ratio-- ---$Mil.- --$Mil.-- --Ratio- Est.
Sales (ratio: % ch.) $ 25.2 -45.6 % $ 27.0 $ 24.8 -1.8 % $-2.2
SRAM $ 6.7 $ 9.0 $ 8.9
1 Mbit $ 3.3 $ 4.5 $ --.-
256k $ 1.8 $ 1.7 $ --.-
Other $ 1.6 $ 2.8 $ --.-
DRAM $ 13.5 $ 12.9 $ 12.3
Graphics $ 4.5 $ 3.6 $ 3.5
Flash $ 0.2 $ 1.2 $ 0.1
Other $ 0.3 $ 0.3 $ 0.0
CGS (r.: % of sales) $(21.0) ( 83.3)% $( 24.0) $( 19.3) ( 78.1)%
R&D (r.: % of sales) $( 3.7) ( 14.6)% $( 4.3) $( 3.3) ( 13.2)%
SG&A (r.:% of sales) $( 2.1) ( 8.5)% $( 4.5) $( 4.9) ( 19.7)%
EBITD (r.: margin) $( 1.6) ( 6.3)% $( 5.8) $( 2.7) ( 11.0)% $+3.1
Dep. (r.:% of sales)-e$( 0.8) ( 3.3)% $( 1.0) $( 1.0) ( 4.0)%
Other (r.: % of sales)$ 0.4 1.5 % $ 0.2 $ 0.2 0.7 %
Nonrec(r.:% sales)-1 $( -.-) ( -.-)% $( 2.3) $( 6.0) ( 24.2)%
Pretax (r.: margin) $( 2.1) ( 8.2)% $( 8.9) $( 9.5) ( 38.5)%
Tax (r.: tax rate) $ 0.7 35.0 % $ 3.3 $ 3.3 35.0 %
Net (r.: margin) $( 1.3) ( 5.3)% $( 5.6) $( 6.2) ( 25.1)%
Equity Invt. (% sales)$ 0.0 0.0 % $ 3.8 $ 3.8 15.3 %
EPS-Basic (r.: % ch.) $(0.03) (160.0)% $( 0.04) $( 0.06) (100.0)%
Sh.-Basic (r.: % ch.) 38.5 ( 6.6)% 41.0 39.4 2.4 %
NOTES: 1) FY3Q98 $6.0 mil. inventory write-down. |
