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Radar System Traders, LLC
Volume 1, Issue 2
September 28, 1998
PART II
Cirrus Logic Will Reduce Work Force And Capacity (09/24/98; 7:16 p.m. EST)http://www.techweb.com/investor/story/reuters/REU19980924S0004
(Reuters) - Cirrus Logic (CRUS) announced it would slash its chip-making capacity and eliminate as many as 500 jobs to cut costs. They may take a charge for restructuring and other things of up to $500 million. It is expected that these charges will coincide with the reporting of second quarter earnings on Oct. 21.
It is expected that CRUS will report 2nd quarter revenues of between $160 million and $170 million with diluted earnings per share to be about break-even. This contrasts the revenues of $178 million net income of $516,000, or 1 cent per share on a diluted basis in its 1st quarter, which ended June 27th.
CRUS, which was basically fabless prior to entering into relationships with both IBM and LU is now trying to eliminate exposure to charges related to the underuse of its Micrus joint-manufacturing venture with IBM, and its Orlando, Fla.-based Cirent Semiconductor venture with Lucent. Cirrus is in talks with IBM to restructure its 48 percent stake in Micrus, and was in separate discussions with Lucent to sell its 40 percent stake in Cirent to Lucent or other third parties.
These moves can have an immediate and positive impact on its earnings and margins, if they are successful. Underutilized fabs are a huge cash burn. To their credit, CRUS has at least 2 programs that could reap nice rewards.
Cirrus has a new CD-RW chip which might be the fastest available. On July 27th of this year, they rolled out what they claimed are the fastest CD-Rewritable (CD-RW) chips in the industry, delivering 40X read and 10X write speeds. The CR3470/75 chips are expected to accelerate the replacement of floppy-disk, hard-disk, and Zip drives by offering more than 650 Meg of data storage at five times the read-data rates and twice the programming rates of competing CD-RW components. The CR-3475 features an integrated DVD port, enabling it to serve as a high-speed bridge between CD-RWs and emerging DVD applications. When combined with an MPEG-2 decoder board or a software MPEG-2 decoder, the chips give users the ability to read DVD content with a CD-RW drive. Both devices have an integrated audio DAC interface armed with Cirrus' audio-data buffering technology, which enables the chips to buffer audio data at the maximum 40X read speed and provide continuous playback. If a portable CD-RW drive is jostled during operation, playback can continue from the buffer while the read heads are reset on the disk, without performance degradation. Volume production was planned for the third quarter
At the end of this past June, Lucent Technologies' Microelectronics Group and Cirrus Logic Inc. announced they were working jointly with ARM Ltd. to develop a line of controllers for the hard-disk-drive market. By building code-compatible controllers on the ARM processor core, both companies hope to exceed their competitors' proprietary devices, which are beginning to choke OEMs' time-to-production schedules with costly software upgrades. This jointly developed chip could be considered a second-source part. The goal is to eliminate the discrete microcontroller and DSP from the hard-disk drive and work toward a single-chip device that may integrate some buffer memory at a later date. Both companies' products will be built around forthcoming instruction-set extensions to ARM's existing ARM9 core. Those extensions are slated for fourth quarter. Cirrus and Lucent plan to work from ARM's road map, and over the next few months, all three parties will develop emulation and debugging tools, and will tailor the ARM extensions to the algorithm-intensive calculations needed to position a disk drive's read head exactly. All this should be ready by mid 1999.
The combination of the successful disposal of the 2 fab related "albatrosses" and these two products discussed could make CRUS very attractive at these prices. The timing of a nice return on this investment is still questionable. Therefore, CRUS bears close scrutiny.
AND NOW A WORD FROM THE RADAR ROOM:
Think Must Regain Investors' Confidence (09/25/98; 7:42 p.m. ET) TechInvestor
techweb.com
Internet-marketing company Think New Ideas, once highly thought of as a Web Company on the rise, closed Friday at 6 15/16, near its all-time low, and is down 82% from its 52-week high 39 1/4 on April 15th. The stock started it massive plunge in late July, when investors started worrying about future profitability. THNK shares took a big hit on Sept. 1st, after Prudential downgraded the stock to "hold" from "accumulate". They predicted THNK revenues would drop close to $2 million due to recent acquisitions that weren't performing. THNK has already warned that it would lose as much as 9 cents a share in the first quarter of fiscal 1999, after it posting profits for two quarters. Potential customers are putting off spending money on marketing in light of world economic instability, it seems.
Prodigy To Sell Stock In A Public Offering (09/25/98; 10:58 a.m. EST)
techweb.com
NEW YORK(Reuters) -- Prodigy Communications, an online Internet Service Provider(ISP) announced Friday it will offer shares in a public offering, with Bear, Stearns & Co. and BancBoston Robertson Stephens as lead-managers. The size of the IPO deal has not been set and its timing will be determined by market conditions. It is not expected to come before November. Prodigy's major rival is AOL, which is the dominant force on the internet, with 13 million subscribers.
This announcement comes a day after online auctioneer eBay, saw its share price rise more than 163 percent in its first day of trading this past Thursday.
Barnesandnoble.com To Raise $100M via IPO (09/25/98; 7p.m. ET) TechInvestor techweb.com
Barnesandnoble.com is going to try and raise $100 million for a 20 percent of the company from its IPO, according to documents filed with the Securities and Exchange Commission on Thursday. This is an obvious defensive move to put a good deal of pressure on Amazon.com, their biggest rival. They are dedicated to making this internet venture successful not so much from a business standpoint, but to embarrass Amazon.com. Barnes and Noble has an edge on Amazon. That edge includes a more comprehensive marketing approach as well as exclusive titles from which Barnes and Noble can collect royalties.
BRKS( ) - Automation is a hot topic in the semiconductor industry because each new generation of chip requires more stringent processing. Wafer handling tools like the
ones Brooks Automation makes become very critical. Brooks' components have been designed into 66% of sub-0.5-micron cluster tools, up from 14% a generation ago, and into 78% of th 300mm tools, according to Credit Suisse First Boston, (rated a "Buy" late last month at 9 3/8). Once wafer handling equipment (like ASYT and BRKS) is incorporated into an equipment design, these components generate revenue for five to seven years, the expected depreciation cycle of this type of processing equipment. Brooks has experienced an expanding customer base, grew its market share and has put tight controls on its expenses. Still, the company could earn $1.20 a share in fiscal 2000. Brooks can earn in the range of $1 a share once the downturn cycle turns to a recovery. It is conceivable that the stock could double over the next 12 months. BRKS is selling at one times sales, 70% of book value, and has a virtually debt-free balance sheet , with $6.50 a share in cash
ANAD( ) - Anadigics pre-announced disappointing Q3 projections Thursday night, fueling a significant drop in its price early Friday morning. They cited slower than expected wireless sell-through, slower than expected Cable TV products, and faster than expected DBS business deterioration. Goldman Sacks did not help matters by lowering EPS estimates but they did maintain their "market out-performer" rating, citing significant potential long term upside. Anadigics valuation remains attractive with book value of about $9.20 per share. I still think Anadigics's long term opportunities in wireless, CATV, and fiber optics remain very positive.
COMS ( ) FQ1 results were better than expected in both revenues, earnings and margins. With inventories down, the margin improvement should continue, rising to an estimated 14-15% by year end, up from 9% presently. FQ2 and beyond are looking good as fundamentals continue to improve. So far we have seen a 40% inventory decline in two quarters, improved gross margins, marketshare advances in key sectors, and what looks to be a strong sustainable domestic market. 3Com has finally turned the corner and has once again become a force in the market. At 17x calendar 1999 estimate the stock may still be undervalued and deserves a higher PE multiple during its margin recovery phase.
Old news but bears keeping in mind: Schwab reports record earnings 9/16/98
Charles Schwab reported that its revenues and net income for the first half of 1998 were the highest in the company's history, and projected that its third-quarter earnings report also will beat Wall Street expectations. They expect to report 3rd quarter 1998 net income of $90-$97 million, and earnings of 33 cents to 35 cents per share on revenues of close to $700 million. This beats analysts expectations by a few cents (2-4 cents). The anticipated results reflect heavy trading volumes which is the core domestic business and no international trading issues.
Shares were at $39.88 and has traded in the $27.75 to $46 range over the past year. They are holding their own amidst all the mayhem in the big brokerage and financial firms exposed to, as yet, unknown and unreported, international financial exposure.
Focused on meeting the needs of investors, they experienced Record levels of customer trading activity during April of 1998 to achieve a 15 percent increase in commission revenues, even as lower-priced Internet trading activity continued to grow. As of the end of June, it had an online customer base of 1.8 million active accounts, with $128 billion in assets. Online trades made up 52 percent of their total trading volume during the quarter, up from 36 percent in the second quarter of 1997. Schwab customers buy and sell more than $2 billion worth of securities through their Web site every week.
Credit Suisse First Boston analyst Bill Burnham stated that online trading companies are reliant on the fact that their volumes are going to vary because of the market's inherent volatility. The more trading, the better off these companies are.
This should follow through to both E*Trade and Ameritrade, who I have mentioned before in this newsletter. Based on the recent activity in the market and the share volumes traded, we should see similar other online traders have higher revenues than expected. Other competitors include Quick & Reilly, Waterhouse Securities, Webstreet.com, Suretrade.com and DLJ Direct.
Schwab is not considered a full-service brokerage such as PaineWebber (PWJ) or Merrill Lynch (MER), two companies I have not been too positive on lately. By the way, both PWJ and MER are still in a downward trend and I think the other show is about to drop on these guys as the real global exposure finally becomes apparent.
Even with some equipment failures and time delays, all of these publicly traded on line brokers should report relatively good numbers for their upcoming quarters. I would expect this to continue well into next year, making these companies quite attractive.
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