Needham's Analyst's Latest Comment -
We believe that any negative move in Vitesse's stock price in
reaction to this announcement from Nortel should be treated as an opportunity.
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05:22pm EDT 29-Sep-98 Needham & Co. (David Wong, Ph.D.) VTSS PMCS LEVL AMCC
Communications Semiconductors: Impact of Northern Telecom Revs Concerns
Needham & Company, Inc. 445 Park Avenue, NY 10022 (212) 371-8300
Equity Research Morning Note David Wong, Ph.D
September 29, 1998 (212) 705-0314
Dwong@needhamco.com
Ryl Ashley
(212) 705-0406
Communications Semiconductor Industry
Impact of Northern Telecom Revenue Concerns
Summary
* We think that news from Northern Telecom's analyst day today caused concerns
about Nortel's revenues.
* We do not believe that stock price drops in Vitesse (VTSS, $24 3/4, Strong
Buy), PMC-Sierra (PMCS, $33 1/2, Strong Buy), Level 1 (LEVL, $22 , Buy) and
AMCC (AMCC, $13 9/16, Buy) are warranted.
* We think that high speed wireline (broadband) remains strong at Nortel.
Wireless and traditional telecom switching equipment are somewhat weaker. The
broadband market is most important to the wireline companies that we follow.
* Vitesse has negligible sales to Nortel.
* AMCC has high exposure to Nortel, with about 20% of revenues coming from
Nortel. From a conversation with AMCC management today we understand that AMCC
has not seen any weakening in its business with Nortel. This is consistent with
continued strength in Nortel's broadband division.
* Nortel is a customer of PMC-Sierra and Level 1 but we do not think that it is
an important customer in either case. About 3% of PMC-Sierra's revenues are in
sales to Nortel.
Discussion
Northern Telecom held an analyst day today, which we believe led to investor
concerns over Nortel's revenues. Nortel said that they expected double digit
year over year growth in the September quarter. This implies a sequential
decline in revenues from the June 98 quarter, unless the year over year growth
is 19% or greater. However, our understanding of the situation at Nortel is
that there could be some weakness in wireless and telecom switching, and that
Nortel's broadband business is in fact still strong. We would like to address
the exposure to Nortel of Vitesse, AMCC, PMC-Sierra, and Level 1.
Vitesse sells almost nothing to Nortel. Vitesse's largest customer (at 20% of
total revenues) is Lucent, which made positive comments at an analysts' day
meeting recently. We believe that any negative move in Vitesse's stock price in
reaction to this announcement from Nortel should be treated as an opportunity.
We are expecting sequential revenue growth for Vitesse of about 17% in the
September 98 quarter with a strong book to bill of 1.17. We reiterate our
Strong Buy rating on Vitesse.
AMCC has more exposure to Nortel than any other company we follow. About 20% of
AMCC's revenues are from Nortel. We spoke with management at AMCC today, and
believe that the company has not had any slowness or pushouts of orders from
Nortel. This would be consistent with indications of continued strength in
Nortel's broadband business. We reiterate our Buy rating on AMCC, though we
think there remains some risk that the market could react negatively to the
Nortel news.
PMC-Sierra and Level 1 sell, we believe, small amounts to Nortel. About 3% of
PMC-Sierra's revenues come from Nortel. We reiterate our Strong Buy on
PMC-Sierra, and our Buy rating on Level 1.
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Well, if you have sat out the last round when VTSS dropped down to
low 20s and regretted in the last couple days, you are so lucky that
now you've got another excellent chance to jump in. DON'T WASTE IT
AGAIN!!! You probably have at most another day or so to fill your
order at below $25, so do yourself a fortune by buying into it
tomorrow! For those who already bot last week, don't worry. Simply sit
out for couple weeks and I will guarantee you that you will have
chances to make money at mid-30s.
Good luck everyone!
MB
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