From SSB:
Vitesse Semiconductor (VTSS)
3S (Neutral, Speculative)
Mkt Cap: $487.1 mil.
July 26, 2002 COMPANY DESCRIPTION
Vitesse Semiconductor is a leader manufacturer of high-speed
SEMICONDUCTORS communications for WAN, LAN, and SAN applications. The
Clark Westmont company manufactures Physical Layer Devices (PHYs), Forward
Error Correction (FEC), and Network Processing chips.
Vitesse uses multiple processes technologies including GaAs
and SiGe to support OC-192 speeds and below, InP for OC-768,
and CMOS for its digital based products.
FUNDAMENTALS
EPS (9/01A) $0.14
EPS (9/02E) ($0.42)
EPS (9/03E) ($0.14)
P/E (9/02E) NA
P/E (9/03E) NA
TEV/EBITDA (9/02E) NA
TEV/EBITDA (9/03E) NA
Book Value/Share (9/02E) NA
Price/Book Value NA
Dividend/Yield (9/02E) NA/NA
Revenue (9/02E) $167.0 mil.
Proj. Long-Term EPS Growth 40%
ROE (9/02E) NA
Long-Term Debt to Capital(a) NA
Convertible No
VTSS is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (7/25/02) $2.46 Rating 3S
52-Week Range $22.20-$2.34 Target Price $5.00
Shares Outstanding(a) 198.0 mil.
PRICE PERFORMANCE
First Call Consensus EPS: 9/02E ($0.42); 9/03E ($0.15); 9/04E NA
Calendar Year EPS: 12/01A ($0.23); 12/02E ($0.35); 12/03E ($0.11); 12/04E NA
INVESTMENT THESIS
We believe that Vitesse will emerge from the current semiconductor downturn
with a stronger competitive position that when it entered.
Historically,
Vitesse has been highly leveraged to analog based PHYs that tend to become
commoditized over time. Currently, Vitesse now generates over 25% of revenue
from digital based products, which we believe have much less risk of becoming
commoditized. We feel that Vitesse is gaining a significant number of
design-wins, especially with its switch fabric and, to a lesser degree,
network processors, that should enable the company to enjoy robust earnings
growth over the next few years. We downgraded VTSS from 1S (Buy, Speculative
risk) to 3S (Neutral, Speculative risk) on September 11th due to news from
customers' customers (i.e., the carriers) is expected to be sharply negative
over the near-term. In essence, the dribbling out of negative 2002 spending
revisions from carriers will likely keep downward pressure on the telecom-
centric IC stocks in the near future.
RECENT RESULTS
Vitesse Semiconductor posted a 2% sequential revenue increase in June,
reporting sales of $43M versus our model of $45M. Cisco was the largest
customer at 10% of sales followed by EMC at 8% of sales and Lucent at 7% of
sales. Gross margins were 46.5%, improving slightly from 46.2% in March. EPS
of ($0.10) were in-line with our estimates.
The book-to-bill ratio was 1.05 in quarter as bookings were $44M in June.
Bookings were flat with March levels. Of the $42M in sales for the quarter,
$27M was from backlog while $16M was in 'turns' business, flat with the level
of 'turns' business for March.
During the quarter the company's cash burn rate was $25 million. Vitesse
reported $472M in cash and $486M in debt at the end of June. DSOs decreased
to 131 days from 165 days in March, and DOIs decreased to 99 days from 106
days in March.
Vitesse announced a restructuring plan for July to reduce its operating
structure. The company will reduce its headcount by 200 employees in the
September quarter. At the end of September the company expects to have
roughly 960 employees. Related to this restructuring, Vitesse took a $695.5M
charge for write-downs of balance sheet items and lease settlements as the
company adjusts to current market realities. Only about $40M of the charges
will be cash based. Once the restructuring is completed, management expects
to lower its breakeven point to $60M from $75M. At a breakeven point of
$60M, Vitesse's is targeting GPM of about 63%, SG&A of $13M and $25M in R&D
spending.
VALUATION
Our $5 price target is based upon a 2.5x book value of about $2.00 per share.
Our 2.5x book value multiple is based on the midpoint of the historical range
that semiconductor stocks have maintained in previous downturns over the past
decade. A price-to-book value metric is used for Vitesse due to the
uncertainties in sales numbers given the difficult telecom environment and
the uncertain path to profitability for the company. Even though the $5
target offers good return possibilities, we believe the risk profile keeps
the stock off of our Buy list.
RISKS
We believe the primary risk to Vitesse is the continued worsening in the
telecom equipment market. Without a recovery, the company could continue to
burn cash without significant operating expense reductions. Vitesse's
balance sheet contains $472 million in cash and $485 million in debt, which
is a more limited cushion than most of its peers. |
