Red Herring Magazine Sept 19, 2001
herring.com
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CENTILLIUM COMMUNICATIONS
The first of our picks owes most of its success to its international focus. Centillium Communications (Nasdaq: CTLM), a maker of chip sets for DSL providers, has a near-total domination of Japan's DSL market. Japan's specification for DSL is subtly but crucially different than that in Europe or the United States, and Centillium has virtually a 100 percent market share for the so-called asymmetric DSL Annex C that's specific to Japanese infrastructure. Ninety-seven percent of Centillium's $120 million in trailing 12-month revenue comes from that source.
That market is still growing fast. While Japan had only 300,000 DSL subscribers as of early July, it added 110,000 in June alone. Consider, too, that South Korea has 3.5 million DSL subscribers and Japan has nearly three times the population of South Korea; the potential upside is enormous. "There's a fear of a slowdown in Japan because we've seen a slowdown in U.S. subscriptions," says Cody Acree, a senior analyst at Frost Securities. "But those fears are misguided."
Centillium draws the remaining 3 percent sliver of its revenue from a burgeoning new business, chip sets that enable the sending of voice over IP (VoIP). Centillium began shipping samples of its Entropia chips a year ago, and the company expects that VoIP chip sets will make up 20 to 30 percent of its 2002 revenue -- a favorable development given the new products' higher margins. "Centillium has the most dense, high-performance technology," says Jeremy Bunting, an analyst at Thomas Weisel Partners. "It's just a question of when the next generation of equipment ramps up and the service providers upgrade."
Centillium trades at 35.1 times 2002 earnings estimates of 42 cents a share, but most analysts haven't built in VoIP numbers. When Centillium's 50 percent long-term earnings growth rate is factored in, the company trades at an attractive price over earnings over growth (PEG) ratio of .7. Even if the company's growth slows in fourth quarter 2001 or first quarter 2002, as Mr. Bunting expects, its long-term prospects in the two markets make it worth a look now. |
