Prudential on earnings:
-The company delivered a “blow out” quarter, with $0.23 in EPS excluding
acquisitions, exceeding our $0.18 estimate by $0.05 (Street was $0.19).
-Revenue up an awesome 30.4% sequentially and 124% Y-O-Y by across the board
demand in infrastructure communications build out.
-Design win activity remains strong (423 in the quarter), with another 1,933
“pending”, positioning the company for continued strong results.
-The acquisition spree over the last year has positioned PMC as the most
formidable player in broadband chip communications. Reiterating our Strong
Buy and 12-month price target of $300 for PMC-Sierra.
PMC Is The Best Way To Play The Internet Infrastructure Buildout
PMC's exceptional quarter once again highlights our thesis that the company is
the premier communications semiconductor play. With the strategic acquisitions
over the past 12 months of Abrizio, AANetcom, Toucan, Extreme Packet Devices,
Malleable Technologies, Datum Telegraphic and now QED, we believe PMC is set
to become the premier semiconductor play over the next several years. No
semiconductor company we know of has the breadth of system level broadband
communications expertise. Period. We reiterate our Strong Buy rating on the
stock and our price target of $300. We believe that our target multiple of 211
times (or roughly four times long-term growth rate) is appropriate given PMC’s
leadership in one of the fastest growing segments of the market. We believe
the company is well entrenched in the infrastructure build-out, and expect
continued robust results to support its premium multiple.
Raising Estimates
For 2000, we are revising upward our revenue and earnings estimates to $564.9
million and $0.95, from $496.3 million and $0.78 respectively. We are also
revising upward our 2001 estimates to $900 million and $1.42 from $735 million
and $1.10 respectively. We believe our upward revisions could prove
conservative, based upon the company’s exceptional design win activity which
is a leading indicator of sales.
June 2000 Quarter Update
PMC reported revenue of $134.1 million for the June quarter, up 30.4%
sequentially from $102.8 million and up 124% year over year from $59.3
million. Earnings per share from continuing operations were $0.23, $0.05 ahead
of our $0.18 estimate, Street was $0.19. EPS were up 35% sequentially and 191%
from the year ago period. Gross margins for the quarter were 79.3%, down 70
basis points sequentially and in line with the 79%-80% near term guidance.
Longer term, gross margins are expected to decline to the 77% level.
Networking Posted 30.1% Sequential Growth - Bookings “Solidly” Above 1:1
PMC’s revenue from the networking segment increased 30.1% sequentially and
134% year over year. At $127.2 million, up from $97.8 million in March, this
was the fourteenth consecutive record quarter for this division. Cisco remains
the company’s largest customer in the high teen’s, as a percent of revenue.
Lucent is the only other 10% customer, providing for well balanced revenue
distribution. The company once again reported that the book-to-bill ratio for
the division was “solidly over one”. Management also guided the Street to 15%
sequential revenue growth for the September, which could prove conservative.
PMC remains active on the design win front within S/UNI, VORTEX, and the TT1
products.
The company’s legacy product line totaled $6.9 million in revenue for the
quarter, 38% above the $5.0 million in the prior quarter. Legacy products
represented an modest 5% of total sales in the quarter. We anticipate that
legacy revenue will remain at approximately these levels in the second half of
2000.
Product Overview - The Pipeline Continues To Expand
We believe that the appeal of PMC’s product line is its longevity, as the
average life cycle typically runs from 5-7 years. Thus, the company is able to
reap rewards for products that were introduced in the market several years
ago, while expanding and filling the product “pipeline” for the future.
Management indicated that roughly 50% of its current revenue is from products
that hit the market in 1996 and before, such as: COMET, S/UNI, FREEDM and
SPECTRA-155. We expect these product lines to continue contributing in
upcoming quarters, but more importantly we expect to start to see greater
revenue acceleration from products introduced in the 1998/1999 time period.
These include: S/UNI - ATLAS (ATM layer device); SPECTRA-622, TUPP+622 and
TEMAP chip set (SONET/SDH/T1/E1 for framing processing, and mapping - utilized
in switches, routers, digital cross connects, and concentrators); Vortex (ATM
based DSLAM); and S/UNI-JET (DSLAMS, customer premise equipment routers, and
access concentrators). Looking out into 2001/02 we see significant revenue
generation from recent acquisitions such as Malleable (MECA DSP - voice over
packet applications) and AANetcom (CMOS OctalPHY - system backplane, or
communication between circuit cards).
Design Win Activity And Pipeline Remains Robust
We continue to be impressed with the fast rate at which PMC has recorded
design wins. The company announced 423 wins in the June quarter, down from a
record 475 wins in the prior quarter (a result of quarterly fluctuations). The
company has recorded 900 design wins through the first half, putting it on a
pace to exceed the 1,517 design wins achieved in 1999. Furthermore, PMC has
1,933 “pending” design wins, well above the 1,600 number reported in the March
quarter. We believe that this bodes well for future design wins and subsequent
revenue streams. We believe that the company’s tremendous research breadth
(discussed below) is a huge asset, allowing for very robust design win
activity. The company generated revenue from 70 different chips, in line with
the prior quarter.
Expansive Talent Pool Continues To Fuel Growth
The company has established one of the deepest engineering teams in the
industry, which has enabled it continually post impressive design wins and
revenue growth. PMC-Sierra increased its head count by 248 in the June 2000
quarter, or roughly 30% sequentially to 1,087. We expect the company to
continue to add new personnel by route of new hires and through strategic
acquisitions, particularly in the area of Field Application Engineers (FAE).
PMC’s expansive R&D effort has been one of the keystones to its explosive
growth and we expect continued efforts to fortify its leadership in broadband
communications.
Acquisition Of QED Further Strengthens PMC’s Broadband Communications Lead
QEDI is a leading provider of MIPS processors, an open architecture processor
that has become very pervasive in communications systems. We believe that by
adding this technology to PMC’s arsenal, the company will be able to
significantly expand its addressable market and thwart the potential threat of
its fixed solution products being replaced by programmable processors. QEDI’s
annual revenue run rate is roughly $45 million, which PMC believes it can grow
to $1 billion within five years. In addition to the companies technical
synergies, we believe they also have many customer synergies. One obvious
example is Cisco (CSCO-65 1/4, not rated), which is a greater than 10%
customer for both companies.
Management Of Supply Chain Is Key To Continued Growth
The company indicated that the supply chain was a tad pinched in the quarter.
While PMC indicated that it did not expect disruptions, management indicated
that companies who are not careful could encounter problems going forward into
the semiconductor cycle. We are of the opinion that PMC indeed is well
positioned to continue to receive the necessary materials, test, packaging
etc. going forward. However, this is a challenge for the industry at this
stage in the cycle and could be a problem for some. We expect PMC to continue
to proactively manage the supplies into customers.
Pace Of Industry Consolidation Could Decelerate
The consolidation in the broadband communications chip market has been
substantial over the last 12-months as the major players position themselves
to offer solutions in all the major functional areas: physical layer,
processing layer and switching layer. We think this consolidation trend is
likely to decelerate going forward given that most of the key players have
been established, to name a few pure-plays: PMC-Sierra, Vitesse (VTSS-86
11/16, Strong Buy) and Applied Micro Circuits (AMCC-153 1/2, not rated). We
believe that PMC's leadership position in understanding the system level
requirements will be a strategic advantage going forward and a major barrier
for newer players to surpass.
Balance Sheet Is Healthy
The balance sheet remains in very strong in our view, with cash and
equivalents at $250 million, up from $223.1 million at the end of March. The
company remains debt free. Inventory days remained flat in the quarter at 42.
Receivable days came in at 43, up slightly from 40 in the prior quarter. |
