DLJ's comments
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07:32am EST 15-Jan-98 DLJ Securities (Krishna Shankar) ALSC
ALLIANCE SEMICONDUCTOR: Third Quarter, Fiscal 1998
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
January 15, 1998 Krishna Shankar (415) 249-2231
Christian Alexander (415) 249-2236
Results were depressed by a $0.10 per share write down of inventory: For
the third quarter, fiscal 1998 Alliance reported $24.8 million in revenue
and a loss of $0.06 per share versus $25.2 million and a loss of $0.03 per
share last year and $29.0 million and a $0.12 per share in the prior
quarter. The company, which had earlier pre-announced that operating
results would be depressed by weakness in DRAM prices, took the opportunity
to write down inventory ($5.8 million was charged to COGS). The weak
operating results and write downs were to some extent offset by the $3.8
million contribution to earnings from the company's pro rata share of
profits in the USC foundry joint venture in Taiwan. Pro forma results,
excluding the inventory write down would be $0.04 per share at a 17% gross
margin.
Reducing estimates: The company has embarked on a strategy of product,
market and customer diversification which will lead to gradual more
consistent earnings growth and expects to enter the flash market in the
coming quarter with both 4Mb and 8Mb parts to complement its presence in
DRAM and SRAM. In addition the company is attempting to re-shift its
product mix back towards SRAM and graphics, were pricing has been more
favorable than in standard DRAM. We believe that the weakness in DRAM will
continue to hurt results and that the transition back to SRAM will be
gradual. We are lowering our FY98 revenue estimates from $130 million and
a loss of $0.05 per share to $116 million and a loss of $0.14 per share to
reflect the gradual ramp of non-PC SRAM and graphics and the persistent
pricing pressures in DRAM. For 1999 we are also cutting our estimates from
$199 million and $0.60 per share to $162 million and $0.40 per share,
respectively. Our 12-18 month target price of $8 is based on a 20 times
multiple of recovering earnings in fiscal 1999 of $0.40 per share and a
secular EPS growth rate of 20% per year.
IMPORTANT POINTS
For the quarter revenues by product line were: DRAM 50%, SRAM 36%, Graphics
products 14%, Flash less than 1%. The corresponding revenue mix for the
prior second quarter, FY98 was: DRAM 63%, SRAM 30%, Graphics products 6%
and Flash less than 1%. By region, the revenue mix was US (55%), SE Asia
(18%), Europe (17%) and ROW (10%). The company plans to target a revenue
mix of: 40% DRAM, 40% SRAM, 15% Graphics and 5% Flash. We believe that
SRAM prices will continue to be somewhat more stable. On the positive
front, Alliance's investment in USC is contributing well to net income and
virtually assures the company access to leading edge capacity. The company
has started development on 0.25 micron memory.
ALSC may offer long-term, small-cap value investors with some upside due to
the company's product and market diversification strategy. Long-term upside
exists with embedded memory PC graphics/multimedia chips, high-speed 0.35
micron 4Mb/16Mb DRAMs, and flash memory. We expect that in fiscal 1999,
ALSC's revenues will move toward a better balance, as follows: high-
speed/high-density 1Mb & 4Mb SRAM's (32%), high-speed 4Mb/16Mb DRAMs (55%),
PC graphics/multimedia (10%), 1Mb/2Mb/4Mb flash memory (3%). |
