Analysts' Latest Comments. Enjoy!
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09:09am EDT 30-Sep-98 Dain Rauscher Wessels (Gollamudi, Raj 612-313-1204) VTSS
VTSS: B-Agg; Revenue Shortfall at Nortel Renews Concerns About Telecom Segment
Dain Rauscher Wessels
A division of Dain Rauscher Incorporated
VITESSE SEMICONDUCTOR, INC.
NASDAQ: VTSS
BUY-AGGRESSIVE
PRICE TARGET: $34
September 30, 1998
Price: $24.75
52-Week Range: $35-$16
Year End: September
Fiscal Year EPS P/E
1997A $0.31 79.8x
1998E $0.54 45.9x
1999E $0.85 29.1x
Cal. Year EPS P/E
1997A $0.36 68.8x
1998E $0.61 40.6x
1999E $0.90 27.5x
Tr. 12 ROE: 15.1%
3-Yr. EPS Gr: 50%
Shares Out: 79.4 million
Book Value: $3.93
Market Cap: $1.96 billion
SEMICONDUCTOR TECHNOLOGY
Raj Gollamudi
rgollamudi@dainrauscher.com
(612) 313-1204
Katherine Egbert
Kegbert@dainrauscher
(612) 313-1310
* VTSS shares sold off again Tuesday, September 29 following revenue shortfall
warnings by Nortel.
* Although Nortel is a not a significant customer, the telecom equipment segment
is a major segment for Vitesse (accounting for roughly 50% of revenues).
* The company has not seen any meaningful slowdown in orders from its telecom
customers to date.
* We expect solid September-quarter results relative to our estimates of $53
million in revenues and EPS of $0.16 with a positive book-to-bill (in the range
of 1.18-to-1.2).
* In the short term, concerns about the health of the telecom equipment will
continue to weigh on VTSS shares, although the long-term outlook looks solid.
* We maintain our Buy-Aggressive rating on VTSS shares. Our 12-month price
target is $34 based on a 40 multiple of fiscal 1999 EPS estimates of $0.85.
Revenue Shortfall at Nortel Renews Concerns About Telecom Equipment Segment
Revenue Shortfall at Nortel Renews Concern About the Telecom Equipment Sector:
VTSS shares sold off Tuesday, September 29 following a revenue shortfall
disclosure from Nortel that revealed that its September-quarter revenues would
be below expectations, although profits would be roughly in line with consensus
estimates. Nortel's announcement comes on the heels of announcements from
several other major telecom equipment vendors including Alcatel, Ericsson,
Tellabs, and CIENA, among others. Alcatel, CIENA, and Tellabs are all Vitesse
customers (albeit minor ones) and together make up about 7% or 8% of Vitesse
revenues. Nortel is not a significant customer. Lucent, which stands out by its
continued bullish outlook and strong order growth, is Vitesse's largest telecom
customer and accounts for more than 20% of revenues. Although the concern about
the strength of the telecom sector is certainly not without merit, Vitesse
continues to see solid demand for its products from its major telecom equipment
customers. Bookings in the quarter from the telecom equipment customers are
strong (Lucent, etc.), and book-to-bill for that sector will be above the
overall book-to-bill ratio. Datacom, which was the highlight of the previous
quarter, continues to be strong with Cisco being an important customer in the
segment.
ATE Business Also an Area of Concern: ATE (automated test equipment) is another
area of investor concern. ATE vendors such as Teradyne, Schlumberger, Advantest,
and others have experienced weakness along with all other semiconductor capital
equipment vendors. However, Vitesse parts are used in high-end equipment by its
customers (Schlumberger and Teradyne are both 10% customers). The high-end
segment continues to be strong. High-end microprocessors and high-speed memories
(e.g. Rambus) are examples of products that are typically tested using systems
that are enabled by Vitesse parts. ATE book-to-bill ratio for Vitesse should be
solid in the quarter and is likely to be up from the June quarter. We expect ATE
to grow better than 10% sequentially. Recall that telecom accounts for 50% of
revenues, datacom for 25%, and ATE for 25%. We remain comfortable with our
estimates for the remainder of the year. Our estimates for the September quarter
(fiscal fourth quarter) are $53 in revenues and EPS of $0.16.
Lower Book-to-Bill as New Fab Accelerates Revenue Growth: With the addition of
new capacity at the company's recently built six-inch GaAs wafer fab in the
September quarter, we should see accelerating revenue growth accompanied by
lower book-to-bill ratios. We expect a strong bookings quarter with a
book-to-bill ratio roughly in the 1.18-1.2 range. Revenue growth in the
September quarter should be more than 15% sequentially. We expect backlog to
grow nicely from the $93 million level in the June quarter.
Stock Opinion: We believe the concern about the overall strength in the telecom
segment (50% of Vitesse' revenues) is likely to continue to put pressure on the
stock in the near term. However, as Vitesse continues to see robust demand for
its products, we should see solid results from the company in the coming
quarters. The company continues to see robust bookings strength in the September
quarter. We continue to like the long-term outlook for Vitesse's business,
which is being driven by the increasing demand for capacity and higher bandwidth
(SONET OC-48 is the sweet spot) in the communications marketplace. Because
Vitesse is focused at the high end of the market, a global slowdown in the
telecom sector is likely to affect Vitesse less severely than other lower-end
vendors. We maintain our Buy-Aggressive rating on VTSS shares. Our 12-month
price target is now $34, based on a 40 multiple (a discount to the projected
three-yr EPS growth rate), on our fiscal 1999 EPS estimate of $0.85. There is no
change in ourN estimates.
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