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By Tom Byrne (9/25/00)
(Talk to Tom in his new 'Tom's Bid & Ask' message board.)
C-Cube Microsystems (NASDAQ: CUBE - Quotes, News, Boards) is not an up-and-coming rapper. It is a highly undervalued company that makes chips for digital devices like DVD players and cellular phones.
In fact, I recommended C-Cube about four years ago, but this is not the same company anymore. On May 2nd of this year, C-Cube Microsystems consisted of two businesses -- a semiconductor business (C-Cube Semiconductor) and a systems business (DiviCom). The semiconductor business was spun-off as a stand-alone entity. DiviCom was merged into Harmonic (NASDAQ: HLIT - Quotes, News, Boards), and subsequently the semiconductor business was reacquired by C-Cube Microsystems.
Today, C-Cube specializes in codecs. The key to interactive communication is a little piece of silicon in the heart of the set-top box called a codec (encoder/decoder). C-Cube is not the only company working on codecs, but it might be the best. Companies like Texas Instruments (NYSE: TXN - Quotes, News, Boards) and Nvidia (NASDAQ: NVDA - Quotes, News, Boards) have competing products, yet no one has developed the perfect codec.
Perfection means having the best video, audio and data quality, as well as synchronization and adaptability. Codecs are silicon chips made expressly for that purpose, but it is extraordinarily difficult to implant the right algorithms on to the chip to achieve perfect video and audio quality. Chip companies have exhausted an exorbitant amount of money, talent and hard labor trying to produce the next generation of interactive codecs. C-Cube is on the cutting edge of codec technology, and it is pushing into new markets including set-top boxes and streaming video.
C-Cube recently signed a deal with Sony (NYSE: SNE - Quotes, News, Boards). C-Cube will make chipsets that are compatible with Sony's professional MPEG IMX VTR solutions. The new chipsets, known as DVxpress-MXT, will be targeted for professional video servers, video editing and VTR equipment.
C-Cube retains a strong relationship with Harmonic. Harmonic will use C-Cube's DVxpert broadcast digital video engine in a new family of stream-processing products that eliminate the decoding and re-encoding required for Digital Turnaround (DTA) and live broadcast applications. This product is targeted for streaming video on computers. An integral part of the stream processing family, C-Cube's DVxpert broadcast codec is a single chip that consumes less than two watts, but delivers the processing power equivalent to that of a multi-chip solution typically used for bitstream splicing and trans-rating applications.
Essentially, C-Cube is now competing directly with Broadcom (NASDAQ: BRCM - Quotes, News, Boards). Both are great companies, but because C-cube is relatively unknown as a new, reshaped company, it is dirt-cheap compared to Broadcom. C-Cube is selling for just two times trailing sales. Broadcom (NASDAQ: BRCM - Quotes, News, Boards) is selling for nearly 100 times sales. C-Cube is selling for eight times book value. Broadcom is selling for 64 times book value.
DON'T LOOK BACK
With the new C-Cube, year-over-year financial comparisons are not meaningful because this is not the same company it was a year ago. The new C-Cube has two quarters under its belt, and they were both pretty solid.
In the second quarter, ended June, revenue hit $61 million, compared with $61 million for the first quarter of 2000. Net income, excluding spin-off-related costs and one-time charges, for the second quarter reached $5.5 million, or $0.11 per share on a fully diluted basis. Actual earnings beat estimates by two cents per share. Earnings in the first quarter were $0.14 per share.
During the second quarter, the company spun-off and it also secured a strategic investment from Thomson Multimedia, a leading provider of digital set-top boxes, DVD players and cable modem products. Thus, the overall reported loss of $0.57 per share was the result of charges related to this spin-off.
C-Cube made significant strides in the set-top box market during the quarter, announcing its first set-top box design win at General Instrument, now owned by Motorola (NYSE: MOT - Quotes, News, Boards) . Cisco Systems (NASDAQ: CSCO - Quotes, News, Boards) successfully tested C-Cube's digital set-top box, demonstrating that C-Cube's silicon and software effectively works with multiple digital video head-end systems, which could be a huge revenue driver.
Bottom Line:
I expect C-Cube to earn $0.55 per share this year, which is three cents per share above the mean forecast. I am looking for 25% growth in 2001 to $0.69 per share, which is five cents above the mean estimate. At Friday's closing price of $17.94, the stock is selling for 26 times the 2001 estimate, which is not cheap by itself. But at two times sales and just eight times book value, I think the stock is undervalued.
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