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Strategies & Market Trends : A.I.M Users Group Bulletin Board -- Ignore unavailable to you. Want to Upgrade?

To: JZGalt who wrote (7954)	7/13/1999 4:49:00 PM
From: JZGalt	Read Replies (1) \| Respond to of 18928

Tom, I'm not a fan of Individual Investor, but this article is pretty much correct. I don't think the ATE flatness tanked the stock. Jul 13, 1999 Semiconductors: Vitesse Semiconductor: Why Investors Overreacted by Chris Bulkey Beating earnings estimates is not enough, as Vitesse Semiconductor (NASDAQ:VTSS - news) learned shortly after trading began on Tuesday. The company reported that revenue for the fiscal third quarter ended June increased 58% to $73 million, while earnings rose 33% to $0.24 per share. This was a penny above the First Call consensus, the fifth straight quarter that Vitesse exceeded estimates. The reward: Its shares quickly sank nearly $8 to $63.88 before recovering somewhat to $68.75, which is still down $3 from the prior day's close. Why the selloff? There were several reasons. However, none of the investors' concerns are enough for us to waver from our long-term support for the company. Vitesse designs, develops, markets and manufactures digital gallium arsenide integrated circuits for telecommunications, data communications and automated test equipment systems providers. Communications represented 81.5% of revenue. The remainder came from its Automated Test Equipment (ATE) business. The communications business grew a very strong 73% year-over-year with particular strength coming from the gigabit ethernet and fibre channel segments, which grew more than 100% year-over-year and 35% sequentially. On the conference call, management was very bullish on this side of the business, noting that bookings were strong. Management stated that they shipped 1.4 million ports during the quarter, and expects to ship close to 2 million units in the fourth quarter. The company forecasts that the datacom side of the business can continue to grow by 25-30% sequentially. With asynchronous transfer mode (ATM) and Internet revenue up 11% sequentially, and strong growth and bookings in the datacom business, the long-term outlook for Vitesse's high growth segments remains solid. Investors are mostly concerned that growth and bookings in the ATE business is flat. Indeed, management concedes that the microprocessor side of the business (Pentium chips, etc.) is a bit sluggish. However, management sees opportunity in mixed-signal (communications) applications. Keep in mind that the company itself is giving somewhat cautious guidance for this area of its business. That said, it notes that the higher growth communications side of the ATE business is only beginning to ramp, and will begin to offset sluggish sales into PC related applications in coming quarters. Since the ATE business altogether represents less than 20% of total sales, analysts in general do not seem overly concerned with the lack of visibility. Another investor concern is its relationship with Lucent Technologies (NYSE:LU - news) . About 20% of Vitesse's revenue comes from selling chips to Lucent for its switches. Here's the rub: Lucent recently outsourced most of its switch-making business to certain contract manufacturers such as Solectron (NYSE:SLR - news) . However, Vitesse has not lost business to Lucent because of this shift. Rather, it has caused longer lead times for Vitesse. However, management insists that these lead times will narrow in the near future. Investors are also concerned about a rash of insider selling during the month of June. However, keep in mind that this selling was not done prior to negative results. The company delivered on its quarterly expectations, and in fact added a bit of upside even during a time of transition with a key customer. In looking at the numbers, especially the growth and bookings in key communications segments, and analyzing the tone of the conference call, it appears that today's reaction is an over-reaction to a high multiple stock with very high expectations priced in. It is also important to note that Vitesse maintains a solid balance sheet and has delivered very strong cash flows, which helps to mitigate some financial risk. Indeed, in the recently completed quarter, gross margins improved to 63.4% from 60.6% while operating margins increased to 35.9% from 32.4% in the prior year, indicating good expense leverage. As a result, we do not expect to see earnings estimates to come down despite the continued transitional issues with Lucent and flat ATE business. In fact, management noted that both areas are performing in line with previous guidance, which should leave previous forecasts intact. To be sure, BancBoston Robertson Stephens analyst Arun Veerappan raised his fiscal 1999 estimate by a penny per share to $0.89 and his fiscal 2000 forecast by $0.06 per share to $1.26. The increase in the 2000 forecast appears to be a reflection of the company's guidance that the business with Lucent will ramp up significantly in the first calendar quarter of 2000. Granted, even after Tuesday's selloff, Vitesse shares are valued at 53 times fiscal 2000 consensus estimates. The valuation is high, but so are the growth prospects. Concerns surrounding the issues discussed above could keep some pressure on the shares over the near-term. But there is no doubt that the company is well positioned as a provider of high performance integrated circuits in fast growing communications markets. Another important factor is that management appears to be running the business well during a transitional period (Lucent and sluggish ATE sales) by improving margins and maintaining a solid balance sheet. Bottom Line: Vitesse is still an attractive holding for long-term investors.