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

To: Beltropolis Boy who wrote (3349)	2/22/2000 10:36:00 PM
From: A. Edwards	Read Replies (2) \| Respond to of 4710

BULLISH COMMENTS ON VTSS FROM MERRILL: Vitesse Semiconductor Corp. - Turn on the GaAs Merrill Lynch & Co. 22 February, 2000 Joseph Osha, Director Investment Highlights: · We met with Vitesse CEO Lou Tomasetta and CFO Gene Hovanec at the end of last week. · Business at Lucent seems on track, and more importantly Vitesse's non-Sonet business continues to grow rapidly. · We are boosting our estimate for the company's datacom revenues, and as a result our FY2001 estimate has gone from $1.07 to $1.15. Our FY2000 net income estimate has gone up by $3 million, although the EPS number remains unchanged at $0.68. · We don't think Vitesse should be trading at a discount to other high-growth communications IC stocks. We are raising our price objective to $90. Fundamental Highlights: · Revenue for the much-watched OC-192 business at Lucent should be between $5 million and $10 million for the March quarter, solidly on track with our earlier estimates. · Growth in the datacom business appears to be very strong - 20% sequential revenue growth appears to be sustainable. A visit with Vitesse's management We visited with Lou Tomasetta, the CEO of Vitesse Semiconductor, and Gene Hovanec, the CFO, at the end of last week. Our conversation left us upbeat regarding Vitesse's prospects for this year - business into Lucent appears to be ramping nicely for the March quarter, and perhaps more importantly Vitesse's revenue outside of the Sonet business continues to accelerate. We are raising our price target to $90, which would put Vitesse at parity with other high-performance communications semiconductor names such as PMC Sierra. We are additionally raising our September 2001 fiscal year estimate from $1.07 to $1.15 - although we have raised our profit estimate for FY2000 slightly as well the EPS number remains unchanged at $0.68. Our intermediate-term and long-term Buy ratings are reiterated. Developments at Lucent, which is Vitesse's largest customer at 18% of sales, have been a drag on the stock. Lucent's problems getting Wavestar out the door have been well documented, and were due in part to Lucent's difficulties qualifying OC-192 cards. Regardless of the cause, the result was a loss of momentum at Lucent, while Nortel, which is supplied by Vitesse competitors Applied Micro Circuits and Triquint, picked up momentum in OC-192. However, based on comments from Vitesse last week, the OC-192 ramp at Lucent appears to be tracking nicely. At the beginning of the September quarter we expected OC-192 revenue to be minimal for Vitesse in the December quarter, but to grow to $5 million or better in the March quarter. That expectation is intact - based on comments during the meeting we expect OC-192 revenue in the March quarter to be between $5 million and $10 million. It's also interesting to note that Vitesse may be making some headway at Nortel. Vitesse has been selling to Nortel for some time as a result of Nortel's acquisition of Cambrian, but other design wins have been lacking. Now, however, Vitesse is expressing confidence that the redesign of many of Nortel's OC-48 cards could provide an opportunity, and Lou Tomasetta indicated that we could see Nortel become a 5% customer by the end of this year. Our conversation with Vitesse also confirmed that the company is still on track financially, especially as regarding continued improvement in gross margin. Our assumption that gross margin will expand to 65.4% in FY2000 and 67% and FY2001, up from 63.1% in FY1999, remains unchanged - the hike in forecast revenue mentioned earlier underlies the improvement to our earnings numbers. We have added about $3 million to our FY2000 earnings estimate, although that is not enough to move the EPS number from the existing $0.68. The change is more significant in 2001, again driven by solely by datacom revenues. Why, then, should Vitesse trade at a discount to the sector? Execution has been extremely consistent - even during the three quarters of 1999 that Lucent showed no growth at all for Vitesse, overall revenue grew by an average of 10% sequentially. Net income did better, growing by an average of 12% sequentially. It seems unfair to penalize Vitesse now, even assuming that Lucent does not perform well in 2000, given Vitesse's demonstrated ability to grow newer parts of its business. Our confidence in the company's ability to deliver our new forecasts is EXTREMELY high. If we assume that Vitesse's automatic test equipment revenues, which are not growing, are worth nothing from a valuation standpoint, and value the rest of the company on a price-revenue basis against the admittedly high benchmark set by PMC Sierra and Broadcom, we can support a price objective of $90. In our opinion, Vitesse should not be trading a discount to those companies.