This makes for a good read....
October 30, 1998 SG Cowen Securities Inc.
Drew Peck
Michael Lins ANALOG DEVICES (ADI - $19 5/16)
Mark Grossman
CONFERENCE COMMENTS: ADI STRIKES BACK WITH TIGERSHARC; STRONG BUY
RATING: Strong Buy
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Quarterly EPS
FY Oct Revision EPS* P/E Q1 Q2 Q3 Q4
1997A $1.04 20.7 $0.23 $0.25 $0.27 $0.29
1998E $0.87 24.2 $0.29 $0.28A $0.15 $0.15
1999E $1.19 18.1 $0.23 $0.28 $0.33 $0.36
======================================================================
*Operating Results
Key Points:
1. ADI and TXN Engaged In A Point/Counterpoint DSP Duel At The SG Cowen
Electronics Conference.
2. In Fact, Both Companies Are Pursuing Different But Well-Conceived
Strategies
3. ADI's Management Appears More Confident That The Analog Market Has
Stabilized.
The management of Analog Devices attended the presentation by TXN,
and was well-prepared to defend their DSP technology. In a classic game
of technological leapfrog, the company debunked TXN's comments about a
DSP performance gap by offering details regarding its upcoming TigerSHARC
DSP. They claim the TigerSHARC will provide 4x the computational
performance of TXN's fastest C6000 DSP while using considerably less
power. As usual, the debate centers on who is actually delivering what.
It is clear that, at the moment, TXN is delivering the fastest DSP. It
is also clear that, in 1Q99, ADI will be able to make that claim.
More important to investors is the fact that the market for pure
performance is extremely small compared to the mass market for DSPs and
that only bragging rights are really at stake. We are of the strong
opinion that the total opportunity for mainstream DSP technology is so
large that it is utterly inappropriate to dwell on specific performance
claims. As ADI's management pointed out, the DSP business mirrors the
analog business in several key aspects. One of those is that each
potential design win for a general-purpose DSP chips has different
criteria, and that success in the business depends on having a broad
array of DSP components that emphasize different characteristics.
In the presentations by ADI and TXN, it become obvious that the
companies do have a major difference in their product development
strategies. TXN appears to be much more focused on the horizontal, with
many different standalone DSP components and concentrating on development
tools. In contrast, ADI appears to be exploiting its mixed-signal
expertise by creating vertical DSP products that tend to be more
application-specific and highly integrated. If there is a significant
advantage to either strategy, it is way too early to discern.
Although ADI is in its quiet period (the quarter ends today),
management seemed more confident than they did at the end of last
quarter. CEO Jerry Fishman said that "we've established the bottom,"
suggesting that the flattish forecast is still intact. He also
maintained that, going forward, the company would be able to outperform
LLTC regardless of the demand environment because ADI is taking market
share in those areas where the company overlaps. When asked about the
potential for divestiture of unprofitable businesses, he said that the
micromachine (airbag sensor) business was still being studied, but that
recent higher volumes would trim the associated losses in that business
in any event.
Bottom Line: Investors have been nervous about ADI because the
company had missed consensus expectations last quarter. Although the
company's comments were necessarily vague about the quarter, we think
that, at least as of yesterday, management was comfortable with current
guidance. More important, the company has unusually high operating
leverage (for an analog supplier), so that a sustained recovery will
result in sharply higher earnings driven by both revenues and gross
margins. As with TXN, ADI's mixed signal products offer some resistance
to economic uncertainty in 1999. We rate ADI a Strong Buy (1).
SG COWEN SECURITIES CORPORATION BOSTON (617) 946-3700 NEW YORK
(212) 495-6000 (212) 278-6000 SAN FRANCISCO (415) 646-7200
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LONDON 44-171-710-0900 GENEVA 41-22-707-6900 PARIS 331-4244-1740
TOKYO 813-3503-0371 TORONTO (416) 362-2229
Further information on any of the above securities may be obtained
from our offices. This report is published solely for information
purposes, and is not to be construed as an offer to sell or the
solicitation of an offer to buy any security in any state where such
an offer or solicitation would be illegal. The information herein is
based on sources we believe to be reliable but is not guaranteed by
us and does not purport to be a complete statement or summary of the
available data. Any opinions expressed herein are statements of our
judgment on this date and are subject to change without notice. SG
Cowen Securities Corporation, or one or more of its employees,
including the writer of this report, may have a position in any of
the securities discussed herein.
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