Thought you guys might want to know some of the comments from Arun Veerappan of Robbie Stephens.
In the current chapter of the company's life, C-Cube Semiconductor will seek to maintain its pioneering
leadership in the encoding silicon arena and grow strategically through the penetration of MPEG-2
decoder markets such as DVD and DVB. In the latter instance, the company?s acquisition of TV-Com
(with front-end silicon for the set-top box) should prove helpful. Intermediate-term, as the stand-alone
decoder markets convert to codec based opportunities (recordable DVD, for instance), we believe that
C-Cube commands a unique position in the competitive landscape, due to its encoding technology
expertise.
Beyond the near and intermediate terms, with the expected and on-going convergence of data, voice
and video onto a single network, we believe that the opportunities facing C-Cube are immense.
Especially so, since the access markets appear to be advancing at a tremendous pace. The 1996 telecom
act has spurred rival players (TELCOs/RBOCs/CLECs vs. the cable operators) to embark on an
unprecedented capital expenditure program to alleviate the bottleneck that the local loop represents.
Indeed, the dynamic of fear has caused a traditional telecommunications player such as AT&T to now
occupy the role as the largest cable service provider in the United States as well. Added to the access rush is the FCC mandate for plans for the simultaneous broadcasting of television digitally for the top
10 domestic markets, commencing in small phases currently and progressing towards a completely
digital broadcast for the nation by 2006. Beyond the access markets, the LAN in corporations (through
the upgrade cycle that over the past years has seen the LAN move from 10Mbps to 100Mbps
technology already and is currently seeing the migration to Gigabit Ethernet) has also become a
tremendous opportunity for applications such as video conferencing through the H.323 standard.
Given the nature of these opportunities, we anticipate that the role of the encoder or codec as the case
may be, clearly becomes critical. This technology, as explained above, is C-Cube's area of expertise. In
addition, we believe that the ongoing access
rush that could provide bandwidth of several Mbps to the
user is a clear boon for digital video. As the access deployments that are beginning to roll out today
(xDSL, cable or wireless) gather speed, we believe that a converged CPE box could represent a major
growth driver for C-Cube's business. To this extent, we expect that longer-term, C-Cube could seek to
gain access technologies in order to capture value in such a CPE box that serves as a DVD player, a set-top-
box and as an internet access device with computational capabilities.
ú DVD: The DVD market is seeing acceptance and fast growth as consumers begin adopting the
DVD as the preferred high-end digital video player of choice. We believe that the DVD is
replacing some portion of the demand that would have been otherwise slated for VCDs and VCRs.
This market is young and growing quickly, estimated to expand over 50% from about 8.5 million
units in 1999. C-Cube supplies decoder chips for this market currently and has a number of key
OEMs sampling its next-generation chip. The company expects to have a substantial share of this
market with its products.
In terms of our expectations, we believe that the DVD sales for the company will grow 20%-plus
sequentially in the June quarter after having declined in the March quarter due to seasonality
(Christmas and the Chinese New Year drive strong sales in the third and fourth quarter). We
believe that in Q1:C00, DVD revenues comprised slightly less than 15% of total revenues.
ú Digital Set-Top Box: This business has seen solid strength in the past few 3-4 quarters, having
grown over 10% in the March quarter and as high as 50%-plus in the December quarter as
customers continue to ramp their production of digital STBs. The STB business derives its
revenues from volume OEM customers such as CVC, Pace, Nokia, Philips as well as by other
programs at new customers for key cable deployments, in our view. C-Cube provides a decoding
solution for its customers in this market and is expecting to see demand augmented as time-shifting
applications gain traction. A time shifting application would include an encoding function as well
as a decoding function in the STB. Going forward, the company expects to see flat sequential
growth in STB revenues in the June and September quarters followed by better than 10% sequential
growth in the December quarter. The STB business comprised more than 25% of total revenue in
Q1:C00.
ú Codec: This business segment is one of the strongest positioned areas of the company, in our view.
The business comprises more than 15% of total revenue today but longer term could become one of
the largest revenue generating areas within the current set of C-Cube's product areas. Today, the
applications for the codec (which is available as a single-chip solution) include non-linear video
editing and time-shifting. The encoding only product is used in the broadcast market (in
applications such as the cable head-end system). With respect to the broadcasting portion of the
business, the company continues to receive wide acceptance for its HDTV encoding solution.
In the March quarter, this business declined slightly on a sequential basis but is expected to grow by
more than 30% sequentially for the June quarter as design wins in the non-linear video editing
market ramp. Longer term, we believe that the single-chip codec will drive the recordable DVD
and DVHS as well as other applications.
ú VCD: The VCD business has been declining on a secular basis since 1997. C-Cube's has focused
itself on markets that have growth potential going forward, with the VCD business having been
deemed as a legacy business that continues to generate cash. We expect the secular trend of
declining revenue to continue going forward as more of the end market transitions to DVD as the
preferred mode of digital video entertainment. To this end, we believe that the growth in DVD
business will be driven by the transition. In the March quarter, VCD declined 7% sequentially after
having grown 60% sequentially in the December quarter due to seasonal strength (as a result of theChinese New Year). Having said that, the exceptional strength will be also be a factor in the steep
39% sequential decline expected in the June quarter. We believe that over the course of the year
this business will decline as a percentage of revenue to the 30% range from more than 40% in the
March 2000 quarter.
In summary, the new pureplay semiconductor solutions C-Cube has a within its grasp several exciting
market opportunities that could drive its business much higher than current levels. The company
believes that its aggregated 40% expansion platform growth will more than offset the expected
substantial decline in its legacy VCD business going forward.
As a result, we are forecasting $256 million in revenue for the C00 and $305 million for C01 (19% Y-Y
growth) with EPS of $0.48 and $0.57 in C00 and C01, respectively.
The company is at a $244 million revenue runrate; it is estimated that revenue contribution could be in
the $305 million range for C01. We estimate that the company will run at a 53% gross margin and
about a 15% operating margin model for C01. We are not factoring in any interest related income for
the company currently. (However, after paying taxes, we estimate that should the company be able to
raise the $200 million that it expects to, it could be able to earn some interest from substantially all of
that amount as the company?s stock has closed at $21.81 yesterday.) Based on the above assumptions
we expect the company to earn $0.57 in EPS on about 58 million shares in C01.
When compared to an average of its competitors (excluding Broadcom: BRCM $175.94, Buy), C-Cube
Microsystems is trading at a discount both on a calendar year revenue and earnings basis. The average
(again excluding Broadcom) P/E for C00 and C01 is approximately 54x and 40x, respectively. The
average P/S for C00 and C01 is roughly 8x and 6x, respectively. On the other hand, C-Cube?s closest
competitor, Zoran (ZRAN $43.13, Buy), is trading at a P/E of 40x for C00 and 29x for C01. This would
suggest a trading range for C-Cube Microsystems of 40x and 54x C00 EPS and 29x and 40x C01 EPS.
Zoran?s P/S is roughly in-line with the group average.
As such, on a P/E basis, C-Cube Microsystems is trading within the range of its competitors (excluding
Broadcom). However, on a P/S basis, C-Cube is trading at a significant discount. An 8x multiple on
CY00 sales would imply a $2 billion market capitalization, which is a 75% premium over C-Cube's
existing market cap. |
