$ 50 TARGET - REPRINT AS BELOW!
Integrated Silicon Solution+* (ISSI)--EPS Above Ests.; Raising EPS Ests.;
Lowering Price Target--BUY
John M. Geraghty, CFA Julie C. Baker
(212) 885-4003 (212) 885-4016
jgeraghty@gkm.com jbaker@gkm.com
October 26, 2000
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Price: 14.00 52-Wk Rng:41.81-5.47 New Price Target:$50 S&P 500: 1365
Old Price Target: $60
Shrs Out/Mk Cap: 28.2Mil/$394.8Mil 5YR Est Growth Rate: 25%
Div/Yield: NA Debt/Cap: 0.2%
Avg Daily Vol: 0.67 Mil
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FY Ends -- EPS -- -- Cal EPS -- P/Cal
Sept Curr Prior P/E Curr Prior EPS
99A ($0.54) N.A. ($0.31) N.A.
00A 0.89A 0.83E 15.7x 1.28E 1.18 10.9x
01E 1.97 1.90 7.1 2.07 2.04 6.8
02E 2.40 5.8 N.E.
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Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
EPS Curr Prior Curr Prior Curr Prior Curr Prior
99A ($0.20) ($0.20) ($0.10) ($0.03)
00E 0.02A 0.14A 0.32A 0.41A 0.36E
01E 0.41 0.37 0.46 0.44 0.51 0.59 0.58
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+ Gerard Klauer Mattison & Co., Inc. is a market maker in the security of
this company and may have a long or short position.
* Within the past three years, Gerard Klauer Mattison & Co., Inc. was the
manager (co-manager) of a public offering of the securities of this company
and/or has performed other banking services for which it has received a fee.
o ISSI reported 4QF00 (Sept.) EPS of $0.41 versus $(0.03) and our $0.36
estimate. Sales of $50.1 million were ahead of our $45.5 million estimate
and were up 30% sequentially. Business was strong throughout the quarter,
with prices generally stable and orders remaining strong. We reiterate our
BUY rating.
o Gross profit margins were 33.4% versus 32.0% in the prior quarter and
24.0% last year. With revenue expected to increase, we believe there is
potential for margin improvement throughout FY2001, but the company is being
conservative at this point. ISSI has been subject to some wafer price
increases from TSMC and the effects will roll through the next two fiscal
quarters. We also expect pricing to increase modestly. Margins improved in
the quarter due to increased units and a better product mix. ISSI's expenses
were in line with our estimates. R&D and SG&A were about 11% and 10% of 4Q
revenues, respectively. In 2001, we expect that R&D and SG&A will each
approximate 10% of revenues.
o Profitability remains strong at ISSI-Taiwan, NexFlash and WaferTech.
ISSI's "Equity in Net of Affiliate Companies" netted $3.69 million in the
quarter, down from $4.15 million last quarter. While performance at the
affiliated companies in 4Q00 was extremely strong, ISSI-Taiwan had an
exceptional month of June (which the company warned would be a one-time
event), which made sequential comparisons difficult. Compared to ISSI, ISSI-
Taiwan has more of a DRAM and commodity SRAM focus. We expect ISSI's
subsidiaries to maintain their high level of profitability into FY01.
o Strong ramp in new products should help drive revenue growth. ISSI's 8
Mb No-Wait SRAMs are ramping well to networking customers. The product was
introduced in January on a 0.25-micron process at prices ranging from $23.45
to $26.45. By the end of the year, we expect ISSI to begin shipping 0.15-
micron devices. We expect a quick transition from its 0.18-micron process
technology as TSMC rapidly moves to 0.15 and eventually 0.13-microns.
o ISSI's strong relationship with TSMC and Chartered Semiconductor should
enable it to procure necessary capacity. With tighter capacity, ISSI is
raising prices quarterly, with increases in the mid single-digit category in
its SRAM business. As mentioned, TSMC raised wafer prices which will ISSI's
affect margins in the next two fiscal quarters. ISSI is currently booked out
for this December quarter and is now taking orders for its March quarter,
indicating continued, strong demand.
o TSMC will use ISSI's SRAMs to drive 0.13-micron process technology
development. Typically, foundries use SRAMs to initially develop new process
technologies. ISSI announced that TSMC will use its SRAMs to develop the
leading-edge 0.13-micron process technology. ISSI also has similar
agreements with Chartered Semiconductor to help develop the 0.18-micron and
0.15-micron process technologies. The decision of these foundries to use
ISSI's technology demonstrates the strength of ISSI's relationships with its
foundry partners as well as the strength of its technology.
o ISSI's product line is about 75% SRAM (mostly high-speed), 20% low-
density DRAM and 5% other. DRAMs typically have been the lowest margin
category. The US market generated approximately 52% of revenue, with Europe
at 22% and Asia at 26%.
o Balance continues to be strong. ISSI has $97 million in cash and short-
term investments on its balance sheet, and carries essentially no debt.
Inventories increased slightly in the quarter by $4.4 million sequentially.
Essentially, ISSI is attempting to keep sufficient inventory on-hand as
foundry capacity has remained tight.
o Significant value in equity investments in ISSI-Taiwan and WaferTech.
Currently, ISSI owns a 43% stake in ISSI-Taiwan, which is planning to go
public on the Taiwanese stock exchange in the fourth quarter of 2000. We
believe the company's holdings in ISSI-Taiwan could be worth about $140
million after an initial public offering. The hypothetical net profit to
ISSI could be roughly $100 million, or $4 per share. Also, we value ISSI's
stake in WaferTech -- a foundry joint venture with TSMC, Altera and Analog
Devices that plans to go public in 2000/2001 - at several dollars per share.
o Raising FY01 EPS estimates, establishing preliminary FY02 EPS estimates
and lowering price target to $50 from $60. As a niche player in the SRAM and
low-density DRAM markets, ISSI should grow revenues at about a 70% CAGR over
the next two years, in our opinion, driven by increased unit sales and
improved product mix and pricing. Profitability has increased nicely in the
reported quarter (4QFY00), with EPS of $0.41 versus ($0.03) last year. We are
raising our FY01 EPS estimates to $1.97 from $1.90 and establishing a
preliminary FY02 EPS estimate of $2.40, given higher revenue and GPM
assumptions and improved profitability at its subsidiaries. Expenses should
remain in line with previous estimates. Based on our preliminary FY02 EPS
estimate of $2.40, we are lowering our price target to $50 from $60, using a
more conservative target P/E multiple of 23x and a discount of 10 % to the
market multiple.
INVESTMENT CONCLUSION
Raising estimates and lowering price target; reiterate BUY rating. We believe
ISSI will experience a sharp EPS recovery. We are raising our FY01 to $1.97
from $1.90 and initiated a FY02 EPS estimate of $2.40. We believe these
numbers are readily achievable. Compared to its peer group, ISSI still
trades at a discount. We have adjusted our price target to $50, based on our
preliminary FY02 EPS estimate of $2.40 and about a 10% discount to the S&P
500 market multiple of 23x. |
