Equity Research Semiconductors October 19, 1999
Charles F. Boucher 415 772-2953 cboucher@bear.com Lattice
Semiconductor* (LSCC-28 3/4) - Attractive Strong September Quarter - Raising
Estimates, Reaffirm Attractive Rating
Long-Term Growth 22% 52-Wk Range $34 5/8-$13 5/8 Market Cap
(MM) $1,434
Target Price $45 Shares Out 49.884MM
Key Points
*** Lattice reported EPS before goodwill of $0.23, ahead of the street consensus of $0.19 and our estimate of $0.20 as it integrated its acquisition of Vantis faster than expected, resulting in lower operating expense.
*** The company saw strong bookings in the quarter, suggesting continued healthy sequential growth in the December quarter. With improving gross margin and tight operating expense controls, we expect operating margin and EPS to increase strongly over the next 2 quarters.
*** Lattice has a strong competitive position in the In-System Programmable (ISP) and low voltage segments of the CPLD market, enabling it to sustain healthy profit margins and strong overall revenue growth. The acquisition of Vantis
should strengthen Lattice's CPLD franchise.
*** We expect to hear more of Lattice's high density FPGA strategy in the coming months, based on technology that was acquired as part of the Vantis transaction. We believe this strategy to be critical to strengthening the company's overall programmable logic business and demonstrating its ability to compete in the long term on a level playing field with its principal competitors.
*** We are raising our revenue and EPS estimates for the company, and raising our 12-month target price from $40 to $45. We are maintaining our Attractive rating until we move further through the current period of turbulence in the
stocks, and can better assess the risk of an inventory correction in the early part of 2000.
Earnings Estimates P/E
Q1 Jun Q2 Sep Q3 Dec Q4 Mar Year Year
1999 $0.21A $0.21A $0.22A $0.24A $0.88A 32.7x
2000 $0.26A $0.23A $0.37E $0.41E $1.27E 22.6x
Previous $0.31E $0.35E $1.12E 25.4x
2001 $0.45E $0.46E $0.48E $0.51E $1.90E 15.1x
Previous $0.37E $0.39E $0.41E $0.43E $1.60E 18.0x
QUICKER INTEGRATION OF VANTIS
Lattice reported EPS before goodwill of $0.23, well above our estimate of $0.20 and the street consensus of $0.19 on revenue of $95 million. The company made more progress on the integration of its Vantis acquisition than we had expected, resulting in lower operating expense levels on higher than expected revenue. The company benefited from strengthening demand for programmable logic in general as well as its faster than expected integration of Vantis.
The company reported exceptionally strong bookings growth from its OEM customers, with backlog up 30% sequentially, although distribution bookings were off 12% sequentially, as distributors consolidated inventory. Overall bookings were strong, with book:bill well above 1.0. The combined revenue from Lattice and Vantis derived about two-thirds of sales from the communications and networking markets, with 20% from data processing and peripherals markets, and about 10% from industrial customers.
The company completed the sales and marketing reorganization of Vantis in North America and Asia, and plans to complete its European reorganization in the next 60-90 days. As part of its reorganization, Lattice has created a new marketing group to focus on new products, and a marketing group to focus on the top 20 worldwide accounts. These moves should increase the company's
visibility to the major accounts and provide a clearer vision of its new product road map.
CLEARER STRATEGIC VISION
Lattice should derive a couple of major benefits from its acquisition of Vantis in addition to increased size and expanded customer base. First, it will have a much larger team of R&D engineers to allocate to new product
development activity, which should improve the company's ability to compete with its principal competitors, particularly at key customer accounts. Second, the company acquired some high density, SRAM-based FPGA technology
at various stages of development as part of the Vantis deal. We are hopeful that Lattice will begin to discuss its high density FPGA strategy in the coming months as the new products move closer to the marketplace. We believe
that the successful implementation of a high density FPGA strategy will strengthen the company's competitive position, and cause investors to view the company as a more capable PLD competitor, with positive implications for
valuation relative to its principal competitors. We think the opportunity for Lattice stock to benefit from P/E multiple expansion as it fills in the gaps in its technology portfolio is at least as important as meeting its
earnings growth expectations in generating shareholder value during the next few years.
RAISING ESTIMATES, MAINTAIN ATTRACTIVE RATING
We are boosting our revenue and EPS estimates for Lattice based on the positive results for its September quarter and our expectation of ongoing expense reduction benefits going forward. We are raising our December quarter EPS estimate from $0.31 to $0.37, our FY2000 EPS estimate from $1.12
to $1.27, and our FY2001 EPS estimate from $1.60 to $1.90. We are raising our target price on the stock from $40 to $45, reflecting a CY2000 P/E multiple in the mid-20 range. Although this is substantially below competitors' valuation range, we believe investors will be unlikely to value
Lattice at parity to its competitors until it broadens its product roadmap to address the same technologies and product categories as its competitors.
We are refraining from a more positive rating on the stock at this point until we move through the period of uncertainty that lies ahead for thesemiconductor stocks and develop improved visibility on the risk of an inventory correction in the early part of 2000. We maintain our Attractive rating on the stock, and would be buyers of the stock at its current price, particularly for longer term investors. |
