Here is part of the research report from RS's Arun Veerappan.
· C-Cube Microsystems held a conference call yesterday to provide an update on the current
quarter (Q4:C00) and guidance for C2001. For Q4, the company reaffirmed its earlier guidance of
$74 million in revenues and EPS of $0.15. For Q1:C01, the company guided for $61 million in
revenues and $0.07 in EPS. Finally, for C2001, the company is expecting $321 million in revenues
and $0.65 in EPS.
· The company’s Q4:C00 expectations for both the top and bottom lines were in-line with what we
were looking for. However, its revenue guidance for Q1:C01 of $61 million represents a 17% Q-Q
decline from our Q4:C00 projections and is $10 million lower than our previous $71 million
revenue forecast for the quarter. The lowered forecast for Q1:C01 can be largely attributed to an
anticipated substantial decline in VCD sales in Asia, combined with an inventory correction relating
to products in its expansion platform businesses (i.e., DVD, STB, and codecs). The company’s
C01 guidance of $321 million in revenues and $0.65 in EPS is based on a sharp re-acceleration in
expectations for the company’s expansion platform businesses.
· We are maintaining our estimates for Q4:C00, but are lowering our expectations for C01 revenues
and EPS to $291.5 million and $0.43, respectively. While we believe that the company could
potentially execute to deliver on its revenue guidance for C01, we are adopting a more
conservative approach in our modeling in order to reflect a slower economic environment for
consumer products in 1H:C01 and in order to provide the company with the opportunity to execute
to a more reasonable set of financial estimates going forward. While we recognize that the near-term
business environment has slowed, we are maintaining our rating on C-Cube stock due to
what we view as the inherent value and positioning of the company’s core digital video technology.
As indicated in their call, C-Cube expects a sharp re-acceleration in Q2:C01 revenues from
expansion platforms as sales to DVD and STB markets regain strength. [obvious they don't believe this] ]However, we have decided
to take a more conservative view and are modeling for slower, but nevertheless, solid, re-acceleration
of revenue growth in the company’s expansion platforms. In effect, we are setting a
more reasonable bar for the company, in our view.
Gross margins are also expected to decline as a result of two main factors: 1) start-up costs
associated with production ramp in a new geometry (0.18-micron) at their fab and 2) lower
expectations for revenues derived from the company’s linear editing business, which typically enjoys
high margins. We are taking the company’s guidance for gross margins at face value as they have
better insight into their own cost structure, and are therefore modeling a decline in gross margins
from 55% in Q3:C00 to approximately 50% in Q3:C01.
In summary, given that we are entering C2001 at a lower-than-expected revenue run-rate, and given
our lowered forecasts for next year combined with the company’s view of a more difficult business
environment, we are lowering our revenue estimates for C01 from $319.6 million to $291.5 million
and lowering our EPS estimates from $0.65 to $0.43. While we recognize that the near-term
business environment has slowed, we are maintaining our rating on C-Cube stock due to what we
view as the inherent value and positioning of the company’s core digital video technology.
Specifically, we refer to the company’s core digital video technology (encoding, decoding and codec
ICs) and understanding of the video markets from a system-level perspective. We point to the fact
that at closing yesterday ($17.38 price/share), C-Cube commanded a market value of approximately
$930 million. We also point to the fact that the company is expected to report $265 million in
revenue and $0.53 in EPS for C00. In comparison, Broadcom a (BRCM, $117.25) purchased a C-Cube
competitor for approximately $1 billion. While this competitor, VisionTech, does have some
critical design wins at some digital video system OEMs, we believe that in terms of technology,
products or revenue (VisionTech is a start-up), C-Cube is substantially ahead. Hence, we believe
that despite the tough near-term business dynamics at the company, investors will recognize the
franchise value of C-Cube and its technology. |
