IDTI: Reports Q1 Upside; Raising Rating(To Buy) and Price Target
Salomon Smith Barney
Thursday, July 15, 1999
--SUMMARY:--Integrated Device Technology--Semiconductors
*IDT reported first (June) quarter EPS of $0.09 ($0.06 fully taxed; versus
a loss of $0.23) on revenues of $154 million, well ahead of consensus and
our estimate of $0.04 on revenues of $149.3 million. The upside came from
both higher revenue and higher margins. *Most importantly, IDT announced
its departure from the x86 business, which amounted to a $0.04 loss this
quarter; and a refocus on communications-oriented businesses, which made up
about 68% of revenues in the quarter. *As a result of the spin-off of
WinChip and firmer pricing in the SRAM arena, we are raising our fiscal
2000 EPS estimate from $0.35 to $0.61 and fiscal 2001 from $0.65 to $1.00.
*Given the sharp improvement in outlook for the company, we are raising our
rating from 3H to 1H with a 12-month price target of $18-20, 25-times our
fully taxed calendar 2000 EPS estimate of $0.71.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 03/99 EPS $(0.23)A $(2.88)A $(0.06)A $0.10A $(3.07)A
Previous 03/00 EPS $0.04E $0.06E $0.10E $0.16E $0.35E
Current 03/00 EPS $0.09A $0.14E $0.17E $0.21E $0.61E
Previous 03/01 EPS $N/A $N/A $N/A $N/A $0.65E
Current 03/01 EPS $0.21E $0.24E $0.26E $0.29E $1.00E
Previous 03/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 03/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:3-H Price (7/14/99).....:$12.06
P/E Ratio 03/00.....:19.8x Target Price..:$19 Prior:6.00
P/E Ratio 03/01.....:12.1x Proj.5yr EPS Grth...:15.0%
Return on Eqty 99...:N/A% Book Value/Shr(00)..:3.17
LT Debt-to-Capital(a)46.8% Dividend............:$N/A
Revenue (00)........:668.20mil Yield...............:N/A%
Shares Outstanding..:90.8mil Convertible.........:Yes
Mkt. Capitalization.:1095.0mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
Exiting the x86 business will improve earnings by $0.04-0.05 per quarter.
Following the example set by National Semi several months ago, IDT
decided this quarter to throw in the towel with regard to the x86
business. When started about three years ago, WinChip had a very simple
design and the company planned to target third tier customers. Like Cyrix
and AMD before it, IDT was not able to move up the speed scale as rapidly
as Intel and as a result underwent a precipitous decline in ASPs from $70
in the first quarter of introduction to $20 last quarter, all without
much improvement in cost. WinChip generated only $3.3 million in revenues
this quarter, but accounted for nearly a $5 million dollar operating loss.
CEO Len Perham steps down.
In a move apparently related to exiting the x86 business, Len Perham, for
nine years head of the firm, has decided to retire. Though Perham's
original plan was to refocus the company on communications, in fact he
quickly became distracted by x86 processors, graphics accelerators and
programmable logic foundry. Only the foundry business, called Clear
Logic, remains and it too may be shut down in a couple of quarters,
saving the company another $0.02 per quarter. Jerry Taylor, who will take
over as CEO at yearend, is widely respected in the company as a nuts and
bolts manager.
Refocusing on Communications Core
Not unlike Cypress (CY, 3H), about 68% of the company's revenues now go
into communications equipment, with Cisco Systems the only 10% customer.
About 24% of sales are high-speed SRAMs, which are mostly used in
networking and wireless communications applications. Specialty memories,
used as signal buffers in networking and peripherals equipment, make up
about 40% of revenues. In addition, about 11% of revenues are MIPS RISC
processors, which also go into networking gear. Within the communications
shipments, networking is 47% of the total, 16% from wireless
infrastructure, and 5% from other communications applications.
SRAM strength continues; prices rising
As we have reported over the past couple of months, overall SRAM prices
have been rising, a trend that IDT has only recently begun to identify.
Over the last six weeks, contract prices have risen by about 30% for most
high speed SRAMs. The average 1Mb is now selling for about $1.50. IDT's
advantage is its manufacturing know-how, which has always kept it in the
lead of the high-speed SRAM pack. IDT is now running pilot 0.18 micron
wafers, compared to 0.30 micron wafers for its nearest comparable,
Cypress.
QSI exceeding expectations
To balance out its exposure to the often volatile memory markets, the
company recently acquired Quality Semiconductor (QSI), a leading maker of
high-performance logic and clocks, which go into personal computer and
general systems. Clocks keep timing across a system to synchronise the
electronic signals. QSI's business (which is included in Logic, which is
23% of the total) is exceeding even management's internal forecasts. The
company is seeing particular strength from the TurboClock and QuickSwitch
product families, which again compete with Cypress. QuickSwitch, a family
of high-speed bus switching devices, is benefiting from the high-growth
of PC notebooks. QSI products greatly strengthens IDT's position in
high-performance logic; the company is second only to Texas Instruments
(TXN, 1M).
Acquisition costs offset by one-time gains
In the first quarter, SG&A expense was about $7 million higher than
expected due to QSI acquisition costs, the closure of QSI headquarters in
San Jose and about $4.5 million paid out in severances and employee
termination agreements. The higher expense was offset by Other Income,
which was also about $6.5 million higher than expected. The one-time
gains recorded were a result of $4.6 million from the sale of the San
Jose fab, the sale of graphics technologies to a UK firm and $800,000
from the repurchase of some convertible debt at less than face value.
Order trends are solid
The company guided analysts to $4-5 million increase in revenue for the
September quarter, which we believe is conservative. Bookings during the
quarter were the strongest the company has seen in several quarters; the
book to bill ratio was solidly above one. And the trends are continuing;
bookings for the month of July have started out at least as strong as
April.
Raising numbers on stronger gross margins
In addition to steady top line growth driven by the communications sector
and QSI, IDT will benefit from a rapidly expanding gross margin. This
quarter's 44.4% gross margin was understated due to reserves taken for
WinChip inventory. Excluding the reserves, we estimate gross margins were
up significantly to 46.4%, a dramatic increase from last quarter at 42.8%
(on a proforma basis). Management guided analysts to 45% gross margins
that should "trend upward," which we believe is very conservative for
several reasons:
1) Following the sale of their San Jose fab, utilisation rates will
continue to improve as the company fills its Oregon fab, which is running
around 80%, and gradually consolidates the former QSI fab. Their Salinas
fab is already running close to 100% utilisation.
2) The company has decided to engage TSMC and Acer Semiconductor as
foundries to further expand its manufacturing output.
3) As mentioned, IDT has already begun to run test lots of 0.18 products
in their Oregon fab. Currently running a 0.25 process, die output per
wafer will nearly double with the planned die shrink.
Valuations for the company historically attractive
We believe our target multiple of 25-times calendar 2000 estimates is
conservative, given the semiconductor group's current multiple of
34-times and the communications chip company multiples of 39-times. On a
price to sales basis, IDT is now trading at only 1.4-times, compared to
an all-time low of 0.4-times and a cyclical peak of 5.2-times in 1995.
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