Prudential on earnings and conference call:
PMC continues to demonstrate superior execution, capitalizing on the fastest
growing market segment within communications semiconductors. We believe that
the company is well aligned with the right industry leaders, yet diversified
enough to help deter against volatile quarterly revenue swings. We believe
that this creates a high degree of earnings visibility for PMC, which should
prove attractive to investors -- especially in light of numerous high profile
earnings pre-announcements the market has experienced.
The company is participating right at the heart of the Internet infrastructure
buildout, an area where we anticipate continued strong demand. PMC has spent
heavily on R&D investment ($129 million invested in the last year and
engineering headcount stands at over 1,100) to pave the way for future growth.
We believe that this growth will be supplemented nicely by the eight
acquisitions it has completed over the past 12 months, whereby the company has
amassed key engineering personnel and complimentary technologies to increase
its silicon content per application. We favor the highly defensible market
position that PMC holds in the WAN space, where typical product life cycles
run from 5-10 years. This is evidenced by the fact that approximately 50% of
PMC’s revenue comes from products introduced prior to 1996-97. Net, net the
company’s outlook is extremely bright, one which we expect to prove rewarding
for investors in PMCS.
Raising Estimates
Based on the strong performance in the September quarter and the continued
momentum we see for PMC’s products, we are increasing our revenue and EPS
estimates. Our new December quarter revenue estimate is $228 million, up from
$172 million. We now expect $0.33 in EPS for the December quarter, up from our
prior estimate of $0.28. We are also raising our 2001 numbers, with revenue
going from $900 million to $1.15 billion and EPS going from $1.42 to $1.64. We
have a high degree of confidence in our new estimates, and expect the
potential for continued upside surprises.
September 2000 Quarter Update
PMC reported $198.1 million in revenue for the September quarter. This was up
32% sequentially and 140% from the year ago period (pro-forma results
including QED, Malleable, and Datum acquisitions). PMC’s core revenues
increased 30% sequentially, with QED (acquisition closed on 8/24 – accounted
for as a pooling) posting an even stronger 48% sequential growth.
Earnings per share from continuing operations came in at $0.31, $0.05 ahead of
our $0.26 estimate (Street consensus was also $0.26). Gross margins were 76.5%
in the quarter, with PMC’s core networking coming in very strong at 79.8%. We
believe that these superior gross margins provide PMC an excellent competitive
advantage, allowing the company to invest heavily in R&D.
Networking Remains On Fire, Up 32.6% Sequentially
PMC’s networking segment witnessed a 32.6% sequential increase in revenue to
$189.2 million in the quarter (up 145% year over year). The company continues
to report solid demand from Cisco, its largest customer in the high teen’s, as
a percent of revenue. Lucent is the only other 10% customer; management
indicated that sales to Lucent remain strong. Remember, the majority of PMC’s
sales to Lucent are into the company’s Internet infrastructure business, which
is growing at over 40%. PMC recorded revenue from over 80 chips (up from 70 in
the prior quarter), while no one chip represented more than 10% of sales. We
believe that this provides excellent earnings diversification.
Legacy products represented $8.8 million in revenue for the September quarter,
or just 4.4% of total sales. Sales from this product line were up 28%
sequentially. We expect the focus on legacy business to remain minimal in the
upcoming quarters and for legacy revenue to diminish as a percentage of total
sales. Management confirmed that it expects to exit its legacy business within
one year.
PMC’s Outlook Is Very Bright
Once again, PMC reported that the book-to-bill ratio for its networking
division was “solidly over one”. Management also guided the Street to 15%
sequential revenue growth for the December quarter, which we believe could
prove conservative. The company indicated that customer backlog is mounting,
which combined with anticipated easing of wafer supply constraints should bode
well for future growth. PMC also pointed to the booking strength of its
customers, highlighting that Cisco’s backlog has gone from roughly $920
million one year ago to $3.4 billion today. We expect PMC to capitalize on
this trend. Management touched upon the capitalization difficulties that some
CLECs are experiencing. It noted, however, that CLECs represent just 14% of
the North American market and less than 5% of the global market. PMC does not
expect any of these issues to negatively impact its business going forward.
Design Win Activity Remains Impressive
Management reported that it had secured 419 design wins in the September
quarter. This bring year to date number to over 1,300, well on its way to
exceeding the 1,517 recorded in 1999. Equally important, its pending design
wins reached 2,444 in the quarter, up from 1,933 in the June quarter. This
provides great visibility to future design wins and subsequent revenue
streams. The company’s R&D machine (over 1,100 engineers) has paved the way
for this tremendous success on the design win front, which we expect to
continue in the foreseeable future.
PMC’s Strategic Acquisitions Make For An Even Brighter Future
PMC has been very proactive in the race to supply complete solutions for the
Internet infrastructure buildout, completing 8 very strategic acquisitions in
the past year. Management has had the foresight to recognize the drive toward
integration and migration to ever increasing outsourcing from major equipment
OEMs. Along the way it has beefed its R&D effort through organic growth,
supplemented by acquisitions (adding approximately 400 engineers). The company
has gained critical technology such as voice over packet DSP capabilities,
switch fabric, OC-48 and OC-192 traffic management, MIPS processors and most
recently quality of service (QoS), URL Switching, virtual private networks
(VPNs), and Firewalling through its SwitchOn acquisition. Management commented
during its September quarter conference call that it is actively sampling many
products from these acquisitions and in some case shipping several million
dollars of revenue (switch fabric acquired through Abrizio). We expect these
acquisitions to greatly increase PMC’s TAM over the next few years, while
increasing its silicon content per application.
Balance Sheet Remains Strong
The company exited the quarter with $333 million in cash and equivalents,
while remaining debt free. Inventory turns were 6 times, while inventory (in
absolute dollars) grew at the same pace (32%) as revenues. Receivable days
were 45 in the quarter, up slightly from 43 in the June quarter. |
