Kaufman Bros. Analyst Reiteration [10/13/00]
ALVIN KRESSLER - FLASH DANCE - KAUFMAN BROS., L.P.
Communication ICs - STRONG BUY - 800 Third Avenue, 25 th Floor
212-292-8149
October 13, 2000
New York, New York 10022
akressler@kbro.com www.kbro.com
SILICON STORAGE TECHNOLOGY, INC.
PRICE: $22 7/16 PRICE TARGET: $60
• Reiterating our STRONG BUY rating and our $60 price target, which is 20 times our 2001 EPS estimate.
• Revenues of $163.7 million were significantly ahead of our recently revised $152.9 million forecast.
• EPS exceeded expectations by $0.02, increasing to $0.37, up 54% QoQ.
• Gross margins improved 30 bps to 45% from 44.7% in the June quarter.
• Sequential unit growth was 26%, with units slightly more than 80 million in 3Q00.
THE QUARTER REVEIWED
SSTI continues to grow at a blistering pace, turning in YoY revenue growth of 365% and sequential revenue growth of 59%, accelerating
from the 2Q00 YoY growth rate of 349%. SSTI reported EPS of $0.37 after the close yesterday, this was significantly better than the
preannounced level of greater than $0.30 per share. The upside in earnings was attributable to product revenues increasing 59% QoQ
and a 30 bps improvement in gross margins in addition to continued focus on operating cost management and leveraging the revenue
growth. For the year, gross margins should begin to increase as the licensing revenue begins to grow more rapidly and SSTI begins to gain
manufacturing efficiency with several of its foundry partners.
SSTI's growth continues to be constrained by wafer availability throughout 2000 and, as such, management continues to pursue more
foundry capacity. To better manage its growth SSTI began to discuss VPAs (volume purchase agreements) with several customers in the
June quarter and is expected to reach agreement with approximately 100 customers in the coming months. The agreements are being
structured as volume agreements with mechanisms for price determination spelled out in the agreements. We believe these agreements will
improve the level of visibility for quarterly demand as well as help management's ability to manage the rapid growth of the company.
Currently, SSTI has essentially sold out its existing capacity through the March quarter and is beginning to book at June orders. We expect
SSTI to add capacity over the long term above its currently projected levels through further licensing agreements and standard foundry
relationships, which should allow further upside to our current 2001 expectations as these agreements move into production mode.
DSOs improved again this quarter down to 68 days from 75 days at the end of June, down from the spike of 92 days in the March quarter.
Inventory turns improved by 2.1 turns in the quarter sequentially, which is very impressive given the steep ramp in revenues. In the near term
we expect SSTI to build some inventory as the revenue ramp continues to be robust, which should allow SSTI to meet customer needs.
THE OUTLOOK CONTINUES TO BE VERY ROBUST WITH LOW-DENSITY FLASH IN TIGHT SUPPLY
Rather than experience a typical YoY price decline of 20% on its products, SSTI has experienced stable to increasing pricing in the last
several quarters as capacity expansion over the last two years did not keep up with unit growth demand in the flash market. We expect
capacity to be added over the next several quarters, however, the pricing environment is expected to remain stable over the near term as
demand for flash memory products continues to outstrip will begin to meet the underlying unit demand in higher
density products until late in 2001. Much of the supply coming online over the next 12
to 24 months is of the NAND variety, which is typically for high-density mass storage applications. SSTI focuses on low-density NOR
type flash focusing on code-storage applications. This delineation can be illustrated by the agreement with Intel (INTC $37 1/8) to
supply, as a licensee, Intel compatible firmware hub architecture flash devices (PC Bios). We believe that Intel is willing to cede market
share in this area because it currently has only a limited ability to supply 2 and 4 Mbit flash devices and the new capacity it is building is
targeting high-density (16 Mbit and higher) flash devices. The 4 Mbit devices are currently experiencing a strong ramp increasing from
500,000 units in the June quarter to over 4.8 million in the September quarter. Additionally, SSTI anticipates that additional densities for
the firmware hub architecture should begin shipping in the near term. This rapid acceptance of the SSTI Firmware Hub Flash reinforces
our belief that this is a significant revenue opportunity for SSTI, approaching $100 million in 2001.
EXISTING OPPORTUNITIES GETTING BIGGER IN 2001
Wireless currently represents 10% of total sales and, as 2001 unfolds, we believe SSTI is in a position to greatly enhance its exposure in the
wireless communications space as Bluetooth products roll out and cellular phones move to stacked flash and SRAM configurations. We
believe the Bluetooth applications will be particularly attractive to SSTI as many of these products will employ embedded flash, which will
flow through the licensing portion of SSTI's revenue mix (above 90% gross margins). We believe embedded architectures will be chosen
for Bluetooth applications due to their inherently smaller package size, lower power needs and lower cost. The stacked flash/SRAM
configuration should have similar advantages for cell phone manufacturers as embedded flash has in Bluetooth applications.
Over the past two years, SSTI has taken actions to address several trends in the flash memory market, in addition to expanding its product
offerings to increase the addressable market for its SuperFlash® products to include both code storage flash and mass data storage flash.
The flash market is expected to approach $7 billion in 2000 for standalone flash products, up from an estimated $4.5 billion in 1999.
Furthermore, SSTI has expanded its addressable market with the addition of embedded flash products for the 8 bit microcontroller market
with a forecast market opportunity of $5 billion in 2000 and the compact flash card market opportunity of $1.5 billion in 2000. SSTI's
complete product family offering from 512K code storage up to 96 Mbyte compact flash cards and the embedded flash and combo-
memory products (flash and SRAM) provide the broad product portfolio plus differentiation that large flash memory users are increasingly
looking for in a supplier of non-volatile memory. To this end the agreements with Intel, National Semiconductor (NSM $33 1/8), and
Apacer Technology, address the ASSP flash and embedded flash opportunities. Furthermore, SSTI indicated that there are another 50
embedded designs, through TSMC, in development.
SSTI announced a partnership with Apacer Technology, a subsidiary of the Acer Group, which allows Apacer to second-source SSTI's
recently announced flash ATA-Disk Chip (ADC) product. This partnership with Apacer allows SSTI to focus on the high-volume, high-
margin controllers, while Apacer works to reduce the overall cost of the high-density memory devices using mass storage mediums. We
expect a push by manufacturers and consumer electronics firms to reduce costs and increase flexibility in the Internet appliance market as it
begins to take off providing a significant revenue opportunity for SSTI in 2001.
EXPECTATIONS INTO 2001
These and many more opportunities in communications equipment and consumer electronics are driving the revenue growth expectations
for SSTI well into 2001. We have increased our 2000 revenue expectations by $30 million to $529 million and we have increased our 2001
revenue estimate to $1.2 billion. Additionally, we have added $0.07 to our 2000 EPS estimate, which now stands at $1.20, and we have
increased our 2001 EPS estimate to $2.96 from $2.50. These are sizable increases to our existing estimates that include a return to QoQ
pricing declines in 2001 as we expect the pricing environment for most semiconductor products will return to more normal patterns of
15% to 20% YoY price degradation towards the end of 2001. The outlook for SSTI continues to be positive, therefore we are reiterating
our $60 price target and STRONG BUY rating. |
