Zoran Corporation (ZRAN): Weak consumer demand, but product cycle drivers remain in 2008 January 29, 2008
What's changed
Zoran reported CY4Q revenues of $129.4 mn (-11.6% qoq), slightly below GS at $131.0 mn (-10.5% qoq) and the Street at $130.8 mn (-10.7% qoq). EPS (including ESOs) of $0.28 was $0.01 above our estimate of $0.27, driven mainly by a one-time tax benefit, partly offset by lower interest and other income. Pro forma EPS (excluding ESOs) of $0.34 was $0.02 above the consensus estimate of $0.32. CY1Q revenues were guided to be $104-$109 mn (down 15%-20%), significantly lower than our original estimate of $125 mn and consensus at $122 mn. EPS (ex ESOs) was guided to be in the range of $0.05-$0.09, well below GS (inc. ESOs) of $0.17 and consensus (ex ESOs) at $0.24. Due to the release of a valuation allowance on tax assets, Zoran expects its 2008 tax rate to temporarily increase to about 30%.
Implications
Given Zoran’s disappointing guidance, we think the company is seeing the effects of what our checks indicate is excess inventory at retail resulting from slower consumer demand in 4Q. Despite this slowing in demand, we believe Zoran is still gaining share with its DVD and digital camera products. In addition, the company has good traction with new digital TV and handset products, and we think that these new products can help Zoran sustain revenue growth despite the macro overhang. We are lowering our 2008/2009 EPS estimates to $0.80/$1.10 from $1.15/$1.30, and are introducing 2010 at $1.15. We look for several catalysts to drive shares higher over the next six months, including evidence of additional digital TV design wins and further progress with handset customers.
Valuation
We are lowering our six-month price target to $17 from $20, which is based on a 22X multiple of our 2008 EPS estimate of $0.80 (inc. ESOs).
Key risks
The primary risks to our view are greater-than-expected price erosion for digital camera and DVD chips and excess inventory in the supply chain. |
