I found this from the latest downgrade by Alex Brown. It has really started to make me very very nervous (to say the least) - please read the last part. Can someone please say something that LSI is not that bad of an investment and we will see the $30's again sometime! Everyday is just another day to lose thousands of dollars (on LSI alone). Gee, and here I was thinking I could retire on LSI byt he year 2000! Didnt know I would be bankrupt by then because of LSI!
-- AB: Downgrading Investment Ratings On The Shares Of LSI Logic An --
BT Alex. Brown Incorporated (E. Klauer/N. Bolton) LSI VLS
Klauer, Erika 212-237-2234 09/03/1998
Bolton, N Quinn (212) 237-2436
BT Alex. Brown Incorporated
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LSI LOGIC CORPORATION (LSI) "MKT. PERFORM"
VLSI TECHNOLOGY, INC. (VLSI) "MKT. PERFORM"
Downgrading Investment Ratings On The Shares Of LSI Logic And VLSI Technology
To "Market Perform" From "Buy" Due To Deteriorating Business Conditions In The
ASIC Market
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52-WK Earnings Per Share
FY Price Price 3-5 Yr Est.
Ticker End 09/02/1998 Range 1997 1998 1999 Growth Chg?
LSI 12 12.19 34-12 1.13A 0.74 0.85 15 N
VLSI 12 8.81 39-9 1.31A 0.25 0.30 10 Y
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HIGHLIGHTS:
Due to declining business conditions in the ASIC market, we are downgrading our investment ratings on LSI Logic and VLSI Technology to "market perform" from
"buy."
The confluence of numerous market and competitive factors, including the negative impact of the weakened yen, the increased competition from larger vertically integrated competitors (such as IBM, Texas Instruments, STMicroelectronics, Lucent and the Japanese companies), and new competition from Cadence and the foundries, has resulted in increased competition and pricing pressure in the ASIC market.
While the effect of these pressures has been exacerbated in the near-term due to the slowdown in the semiconductor market, we do not expect these factors to disappear as the semiconductor cycle begins its next growth cycle.
As a result, we expect increased competition and pricing pressure to limit the revenue growth and profitability of LSI Logic and VLSI Technology over the long-term. Due to our cautious long-term outlook, we no longer recommend that investors make new commitments to the shares of either company.
With both LSI Logic and VLSI Technology issuing negative prereleases regarding 3Q:98 revenues and earnings over the past two weeks, we have taken this opportunity to reflect on the current competitive environment in the ASIC market and to revise our long-term competitive outlook for the ASIC market.
Specifically, LSI Logic and VLSI Technology have both recently announced that 3Q:98 revenues will fall short of 2Q:98 levels by 5-10%, with an even greater decline in EPS forecast. Each company cited the following factors as contributing to the weak business environment:
(1) pricing pressure due to the devaluation of the Japanese yen versus the U.S. dollar which has allowed Japanese competitors to undercut pricing and which has enhanced the negotiating power of Japanese customers,
(2) a slowdown in orders in the telecom and computer markets, with particular weakness in orders for cellular handset ICs,
(3) increased competition from the large, vertically integrated semiconductor manufacturers such as IBM, Lucent, STMicroelectronics and Texas Instruments,
(4) competition for the first time from "virtual semiconductor" companies which outsource the design of integrated circuits to EDA companies, such as Cadence, outsource the manufacturing of the designs to foundries, such as TSMC or UMC, and outsource the packaging and testing of the ICs to independent package and test companies, such as Amkor Technology, ASE or Siliconware Precision, and
(5) the general slowdown in the semiconductor industry.
After conducting some industry field checks, we have determined that in addition to the above factors, LSI Logic and VLSI Technology are currently losing market share at significant customers (Sun Microsystems in LSI Logic's case and Ericsson in VLSI Technology's case).
The impact of the above factors has been an increase in competition and pricing pressure in the ASIC market during the past year. Taking a longer term perspective, we do not see any of the above factors disappearing in the future with the exception that we do expect to eventually see a recovery in the semiconductor market. Below, we explain our thoughts.
(1) Given the current banking crisis in Japan, we do not expect the yen to appreciate any time soon versus the U.S. dollar. In fact, until the Japanese banking industry undergoes a major reform to address its current bad debt problems, we would expect the yen to remain flat to slightly down versus the U.S. dollar. As a result, we believe that pricing pressure from Japan will continue to plague U.S. ASIC suppliers well into the future.
(2) While we expect end-user demand for telecom equipment (including wireless
handsets) and computers to remain robust over the long-term, we believe that
these high volume businesses will become increasingly commoditized over time as
semiconductor ASIC companies design standard products to address these markets.
In our opinion, the commoditization of these markets will have permanent and
adverse impact on the profitability of products designed for these markets in
the future.
(3) As the U.S. vertically integrated semiconductor companies continue to expand their core competencies and their intellectual property portfolios, we expect a greater overlap between these companies' ASIC capabilities and those of LSI Logic and VLSI Technology in the future. Given the greater financial, sales and marketing resources possessed by these vertically integrated semiconductor companies, we expect them to have an advantage versus smaller competitors such as LSI Logic and VLSI Technology.
(4) Given the extremely low barriers to entry in the "virtual semiconductor" business, whereby everything from IC design to IC manufacturing to IC packaging and testing are all outsourced, we expect to see dramatic growth in the number of "virtual semiconductor" companies in the future. In addition, as owners of intellectual property increasingly license their cores to third parties, the functionality of "virtual semiconductor" company designs will ncrease. In our opinion, these companies will represent a growing competitive threat to existing ASIC vendors including LSI Logic and VLSI Technology.
(5) By definition, ASICs are designed for one particular customer and tend to be high volume products. As a result of the increased competition, we believe that it will become increasingly difficult for any one company to remain the dominant ASIC supplier to a given customer over time. As companies jockey for design wins, we expect ASIC suppliers' revenues to become more volatile over time. Consequently, we believe that valuation multiples for ASIC suppliers will decline to reflect the higher volatility.
In summary, we expect increased competition and pricing pressure to limit the revenue growth and profitability of ASIC companies in general, and LSI Logic and VLSI Technology in particular, over the long-term. Due to our cautious long-term outlook, we no longer recommend that investors make new committments to the shares of either company. As a result, we have lowered our investment ratings on LSI Logic and VLSI Technology to "market perform" from "buy." In addition, we have reduced our 1998 and 1999 EPS estimates for VLSI Technology to $0.25 and $0.30, respectively, to reflect our outlook. Our estimates for LSI Logic remain unchanged at this time.
Additional Information Available Upon Request
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Technology, Inc.. There is a (are) convertible issue(s) outstanding on VLSI Technology, Inc.. First Call Corporation - all rights reserved. 617/345-2500 |
