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Technology Stocks : Vitesse Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: Neil H who wrote (3255)	1/11/2000 6:10:00 PM
From: A. Edwards	Read Replies (1) \| Respond to of 4710

Prudential's take on VTSS Q1 earnings: January 11, 2000 Hans C. Mosesmann John F. Barton - Vitesse grows December-quarter revenue by 10.7% sequentially and reports EPS of $0.14, meeting our estimates and street consensus. Increased R&D spending to accelerate new product introduction and leads to decrease of $0.01 in our March 2000 estimate. - Lucent inventory issue (transition to contract manufacturing) is behind the company. However, sales to Lucent grew 8% sequentially in the December quarter. Expect 12-14% sequential growth going forward as OC192 systems start to ramp. - We reiterate our Strong Buy rating and our 12-month price target of $64. We believe VTSS shares are a compelling investment relative to other communications chip pure-plays. We Believe Vitesse Shares Are A Bargain At The Current Price: Vitesse is currently trading at 68 times our calendar 2000 earnings estimate. This is a relative bargain when compared to companies such as AMCC, PMC-Sierra, and Transwitch, which are currently trading at 155, 128, and 86 times calendar 2000 consensus earnings estimates respectively. We believe that Vitesse's share price continues to suffer from the "Lucent overhang". First it was Lucent's inventory adjustment and most recently Lucent's preannounced miss for the December quarter. We believe Vitesse's on-going product, market, and customer diversification trend is a compelling story. We reiterate our Strong Buy rating for Vitesse with a $64 price target. Our valuation is based upon a multiple of 70 times our previous, and in our view, conservative calendar 2001 earnings estimate of $0.91. Vitesse Is A Communications Solutions Company, Not A GaAs Company: Vitesse is currently developing four new products using SiGe (Silicon Germanium). Seven percent of Vitesse's current revenue is contributed by products manufactured on a CMOS process. Vitesse is currently developing a bipolar like GaAs process that will enable support of 40 gigabit data rates. The fact is that Vitesse is not just a GaAs company but rather a company with the ability and intention to capitalize on profitable market segments which can be addressed with its broadband communications expertise. The company has stated that it will use the optimal process technology for each targeted application, and as such we expect to see more product introductions from the company that are not based on its standard GaAs process. We believe this trend is important as Vitesse moves to expand its available market by introducing parts in the areas of switching, processing, and high-speed transmission. Sales To Lucent Growing Once Again: Sales to Lucent were up 8% sequentially substantiating management's position that the previous inventory adjustment, which caused sales to this almost 20% customer to be flat in two previous quarters is indeed behind them. The company expects sales to Lucent to grow at a 12% to 14% sequential basis going forward as OC192 transmission systems start to ramp into volume. In December quarter Lucent accounted for 17% of total sales. Aggressive Introduction of New Products Continues: The company sampled fourteen new products in the December quarter. The new product introductions spanned several market segments. New products were introduced in the areas of OC192, multi-rate (one component that will support several different transmission speeds), Gigabit Ethernet array, and SAN (Storage Area Network). In order to support the aggressive new product development, the company has aggressively staffed design centers. The company expects to continue its staffing efforts and as such has increase R&D spending to approximately 17% of revenue. This is up from the recent run-rate of close to 16%. This increased level of spending did slightly decrease our earning estimate for the March 2000 quarter by $0.01. We believe this additional investment will positively impact future earnings as the company is able to address new markets with the added products. An important growth area for Vitesse is switching layer chip solutions which represented $0 in 1999 and could contribute $200 million per year by 2001. Current switching product design wins of 20 (at $10-$20 million per) indicates this could be a conservative outlook.