Wachovia take on the q:
WACHOVIA SECURITIES
April 22, 2003
VTSS: In-line FQ2, Modest Growth, Maintaining Market Perform
Company Note
Vitesse Semiconductor Corp. (VTSS- Stock Rating: MARKET PERFORM
Karl Motey / (415) 490-1208
Niraj Patel / (415) 490-1211
Key Points
* Reported in-line FQ2 results. Revenue of $40.2M flat q/q and a loss per share
of $0.05 in-line with our/consensus estimates of $40M and a loss per share of
$0.05. Management is guiding FQ3 revenue growth of about 7-8% q/q growth
(versus consensus estimates of $42.7M or 6% q/q).
* Growth across Storage, Metro, Enterprise. Storage revenue was up 8.6% q/q to
$20.2M, driven by continued momentum with its 2GB FC switches. Metro was up 7.6%
q/q to $7.1M with design win ramping. Enterprise was up 4.7% q/q to $8.9M. Long
haul core revenue declined 11% q/q to $4.0M.
* Modest growth in the June quarter. Management expects sustained growth across
its storage, metro, and enterprise segments in FQ3, behind continued momentum in
metro (up 15% q/q), storage (up 7.5% q/q) and enterprise (up 6% q/q).
* Maintaining 2003 estimates. We are maintaining our FY03 estimates of $168.2M
and ($0.19). We are introducing our FY04 estimates of $231.5M and $0.03,
modelling break-even in CQ4 2003 at revenue level of $53M.
* Maintaining our Market Perform rating. We continue to rate shares of Vitesse
Market Perform given the company's sluggish growth in its long-haul business,
the high turns environment, and a highly competitive market exposure.
Valuation Range: $2.50 to $3
Currently VTSS is trading at a discount to our coverage group, at an enterprise
value/2003 sales of 2.8x vs 3.8x. We anticipate that the stock will trade in a
range of $2.50-3.00, based on 2.6-3.2x enterprise value /2003 sales. Risks
include pricing pressure and extended sluggishness in the company's end markets.
Investment Thesis
Vitesse remains a primary comm IC supplier for the telecom market, while
continuing to penetrate the storage and datacomm markets. On the basis of weak
fundamentals for comm IC suppliers and limited visibility, we maintain our
Market Perform rating on the shares of VTSS.
Discussion
Reported in-line FQ2 results
Revenue of $40.2M flat q/q and a loss per share of $0.05 in-line with
our/consensus estimates of $40M and a loss per share of $0.05. Management is
guiding FQ3 revenue growth of about 7-8% q/q growth (versus consensus estimates
of $42.7M or 6% q/q). Gross margin was 52.1%, sequentially up due to increased
revenue growth and steady ASPs. As expected, operating expenses for the quarter
were sequentially down to $37.6M (from $38.9M), with R&D of $23.5M (from $24.5M)
and SG&A of $14.1M (from $14.4M). In FQ2 one customer accounted for 10+% of
sales, EMC.
Growth across Storage, Metro, Enterprise
Storage revenue was up 8.6% q/q to $20.2M, driven by continued momentum with its
2GB FC switches. Metro was up 7.6% q/q to $7.1M with design wins ramping across
several major equipment OEMs (i.e. Lucent). Enterprise was up 4.7% q/q to $8.9M.
Long-haul core revenue declined 11% q/q to $4.0M. On the product front, the
company’s 2.0GB Fibre Channel Switch IC targeting embedded storage area network
(SAN) applications including RAID Controllers, Switches and SBODs (Switched
Bunch Of Disks), continues to gain momentum in the storage market. In the metro
segment, management remains enthusiastic behind its OC-48-192 SONET framer,
citing design win rates of 60-70% against the competition (i.e. AMCC, PMCS) over
the last 12 months.
Modest growth in the June quarter
Management expects sustained growth across its storage, metro, and enterprise
segments in FQ3, metro (up 15% q/q), storage (up 7.5% q/q) and enterprise (up 6%
q/q). We are maintaining our FY03 estimates of $168.2M and ($0.19). We are
introducing our FY04 estimates of $231.5M and $0.03, modelling break-even in CQ4
2003 at revenue level of $53M.
Book:bill up, turns remain high
Management noted increased visibility, citing an improvement in its customer
forecasts as opposed to an increase in order lead times. While Vitesse’s
book:bill increased to 1.10 in FQ2 (from 1.07), turns remain high. According to
our estimates, we believe about 42% turns business is required to meet its FQ3
guidance.
Balance Sheet analysis
Vitesse’s cash balance declined to $233M (from $247M) and debt declined to $195M
(from $201M), resulting in a net cash per share of $0.19. Cash usage from
operations was about $13M, above management’s expectations of $10-11M due to an
increase in inventory purchases (concentrated orders for its multi-channel
storage transceiver in April). Inventories were up to $32.2M (from $29M). DSOs
declined to 79 days from 84 days. DOI declined 166 days from 167 days.
Maintaining our Market Perform rating
We continue to rate shares of Vitesse Market Perform given the company’s
sluggish growth in its long-haul business, the high turns environment, and a
highly competitive market exposure. Currently VTSS is trading at a discount to
our coverage group, at an enterprise value/2003 sales of 2.8x vs. 3.8x. We
anticipate that the stock will trade in a range of $2.50-3.00, based on 2.6-3.2x
enterprise value /2003 sales. Risks include aggressive pricing and extended
sluggishness in its end-markets. |
