10:26am EDT 16-Oct-98 Raymond James & Associates (Shekhar Wadekar, Ph.D. 813-5
VTSS REPORTS Q4 EPS OF $0.21 VS $0.13 A YEAR AGO - REITERATE BUY (1)
COMPANY COMMENT RAYMOND JAMES & ASSOCIATES
MEMBER NEW YORK STOCK EXCHANGE/SIPC
Semiconductors Shekhar G. Wadekar, Ph.D.
October 16, 1998 (727) 573-8240
Patrick Franke, Research Assoc.
VITESSE SEMICONDUCTOR CORP.
(NASDAQ-VTSS) -- RATING: BUY (1)
Current Price (10/15/98) $24.44
52-Week Range $37.19-$15.81
Projected Range* $32.00-$21.00
Forward P/E* 29.1x
Dividend/Yield $0.00/0.0%
Book Value (9/30/98) $4.22
Suitability Aggressive Growth
Shares Out. (mil.) 73.2
Market Cap. (mil.) $1,789.0
Avg. Daily Volume (Sept) 2,068,571
Proj. 3-Year EPS Growth Rate 50%
ROE (9/30/98) 17.5%
L-T Debt (mil.)/% of Cap. $0.0/0.0%
Com. Equity (mil.)/% of Cap. $340.7/100%
*Based on EPS estimate of $0.84 for the 12 months ending 9/30/99.
OLD NEW
EPS (FY=Sep) 1997A 1998E 1998A 1999E 1999E
4Q1 (Dec) $0.08 $0.13A $0.13 $0.17 $0.18
Q2 (Mar) 0.10 0.15A 0.15 0.19 0.20
Q3 (Jun) 0.12 0.18A 0.18 0.21 0.22
Q4 (Sep) 0.13 0.20 0.21 0.22 0.24
Full-Year Results $0.43 $0.66 $0.67 $0.79 $0.84
Revenues (mil.) $104.9 $173.7 $175.1 $264.2 $278.6
Columns may not add due to rounding.
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Vitesse Semiconductor Corporation, based in Camarillo, California, designs,
develops, manufactures and markets digital gallium arsenide integrated
circuits. Vitesse uses its proprietary high-integration gallium arsenide
technology to produce products used primarily by telecommunications, data
communications and automated test equipment system providers.
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* Vitesse realized another solid quarter, reporting 4QFY98 revenues of
$54.1 million and EPS of $0.21 vs. revenues of $30.8 million and EPS of
$0.18. With backlog growing and near perfect visibility into the coming
quarter, we are raising our FY99 estimate from $0.79 to $0.84.
* Despite challenging times in the semiconductor industry, Vitesse grew
revenues for communications products over 75%, and revenues for ATE
components grew a comparable amount, despite steep reductions in capital
expenditures by semiconductor manufacturers, indicative of the advantages
of GaAs technology over traditional bipolar solutions.
* In an uncertain environment, Vitesse has demonstrated an amazing ability
to strongly grow revenues and backlog based on proprietary technology and
solutions targeted mainly towards rapidly growing markets. With an
incredibly high level of visibility, limited competitive presence and
expanding multiple opportunities, we continue to rate Vitesse BUY (1) with
a $32.00 12-month price target.
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Investment Conclusion:
Vitesse has demonstrated an uncanny ability to deliver superlative
performance in a rather turbulent industry. The company has few
significant competitors, a growing backlog, and delivers proprietary
solutions based on unique technology. In 4QFY98, the company has again
delivered an astounding 75% year-over-year revenue growth in both target
sectors -- communications as well as ATE -- in an environment
characterized by plunging demand for semiconductor capital equipment
worldwide, and concerns about the evolution of telecommunications
infrastructure expenditures. Although capacity constraints have eased,
backlog continues to grow in-line with revenues, with orders exceeding
sales. As expected, the book-to-bill ratio has declined to 1.17 from 1.25
in 3QFY98 as capacity constraints ease. The stock currently trades at a
29.1x multiple of our forward four-quarter estimate of $0.84 per share,
despite the potential for over 50% revenue and fully taxed earnings growth
in FY99. In light of a large backlog and consistently strong execution, we
reiterate our BUY (1) rating with a $32 12-month price target.
Details/Outlook:
* Vitesse once again delivered record revenues (up 75% YoY) and earnings
for 4QFY98. The company booked over $63 million in new orders in the
quarter, and, as before, enjoys nearly 100% visibility for 1QFY99. With
rising orders, the six-month shippable backlog has swollen to over $103
million, up from $93 million in 3QFY98.
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Sector 4QFY98 Sequential Composition Book-to-bill Orders Sequential
Revenue (mil.) Growth (mil.) Growth
_____________________________________________________________________________
Telecom $26 21% 48% 1.22 $32 19%
Datacom $15 16% 28% 1.21 $18 7%
ATE $13 9% 23% 1.07 $14 -5%
_____________________________________________________________________________
Total $54 17% 100% 1.17 $64 10%
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* Vitesse is emerging as one of only a few companies to deliver high-speed
integrated solutions into the communications sector. This uniqueness
enables Vitesse to enjoy unparalleled visibility into the next two
quarters, while continuing to garner rising orders from equipment
suppliers into the telecom/datacom markets. SONET/SDH activity shows every
indication of continued growth, and we therefore feel there is little risk
to order cancellation and push-outs. Product cycles in communications
infrastructure tend to be long and are only moderately affected by
macroeconomic trends.
* Although capital expenditures worldwide are declining in the
semiconductor industry, Vitesse's high-speed tightly integrated solutions
enabled the company to post modest sequential growth in revenues for this
sector, based on the ability to deliver high-precision integrated
solutions to tester manufacturers. We believe this capability will further
enhance Vitesse's position in this market, as tester manufacturers seek
out ways to lower system costs and yet deliver testers for a variety of
high-end components, such as microprocessors, mixed-signal chips as well
as the emerging market for high-speed memory. These trends are likely to
continue growing, as chip vendors seek to offer more complex solutions to
customers in an ability to shore up ASPs and maintain margins in a tough
environment, while seeking to reduce manufacturing and testing costs. An
indication is the slight pick-up in the pace of revenues from Japan, which
are primarily derived from ATE sales.
* We are not at this stage worried about competitive pressures arising
from silicon-germanium (Si-Ge) technology. Si-Ge technology is primarily a
bipolar technology and has the same limiting factors as traditional
bipolar technology, primarily lower integration densities. In most
systems, the ability to integrate multiple functions into fewer chips is
highly desired. In communications, mixed-signal integration is a highly
sought out technology. GaAs MESFET technology clearly has an upper hand
over BiCMOS solutions, where trade-offs are imperative due to the
disparate processes used. In addition, particularly for telecom/datacom
infrastructure with long product life cycles, equipment manufacturers are
unlikely to adopt a solution with limited data on reliability.
Furthermore, qualification cycles for both components and sub-systems tend
to be fairly long, in effect delaying any potential competitive threat
from this technology. We are not highly concerned about meaningful
competitive pressures, particularly at the high-end, from Si-Ge at this
time.
* As GaAs unit volumes increase, the costs should drift lower. Clearly,
customers will evaluate solutions on a cost per function basis. Vitesse
has a head start on the competition with its higher integration
capabilities, and at least for the next several years, we believe GaAs can
compete very well against Si-Ge technology. Secondly, for many firms,
design talent could initially be an issue as they attempt to deliver
equally complex solutions with a nascent technology.
* The absence of major competitive presence is reflected in the rising
backlog for the company. Incumbency, coupled with a lack of standards, is
an effective barrier to entry that can only be overcome through
significant margin erosion. Consequently, we believe Vitesse is currently
uniquely positioned as a strategic supplier to the high-speed
communications industry. We thus reiterate our BUY (1) rating with a $32
price target. |
