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Technology Stocks : ISSI a great opportunity -- Ignore unavailable to you. Want to Upgrade?

To: Czechsinthemail who wrote (1037)	10/26/2000 5:49:12 PM
From: Ram Seetharaman	Respond to of 1058

$ 50 TARGET - REPRINT AS BELOW! Integrated Silicon Solution+* (ISSI)--EPS Above Ests.; Raising EPS Ests.; Lowering Price Target--BUY John M. Geraghty, CFA Julie C. Baker (212) 885-4003 (212) 885-4016 jgeraghty@gkm.com jbaker@gkm.com October 26, 2000 ____________________________________________________________________________ Price: 14.00 52-Wk Rng:41.81-5.47 New Price Target:$50 S&P 500: 1365 Old Price Target: $60 Shrs Out/Mk Cap: 28.2Mil/$394.8Mil 5YR Est Growth Rate: 25% Div/Yield: NA Debt/Cap: 0.2% Avg Daily Vol: 0.67 Mil ____________________________________________________________________________ FY Ends -- EPS -- -- Cal EPS -- P/Cal Sept Curr Prior P/E Curr Prior EPS 99A ($0.54) N.A. ($0.31) N.A. 00A 0.89A 0.83E 15.7x 1.28E 1.18 10.9x 01E 1.97 1.90 7.1 2.07 2.04 6.8 02E 2.40 5.8 N.E. ____________________________________________________________________________ Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q -- EPS Curr Prior Curr Prior Curr Prior Curr Prior 99A ($0.20) ($0.20) ($0.10) ($0.03) 00E 0.02A 0.14A 0.32A 0.41A 0.36E 01E 0.41 0.37 0.46 0.44 0.51 0.59 0.58 ____________________________________________________________________________ + Gerard Klauer Mattison & Co., Inc. is a market maker in the security of this company and may have a long or short position. * Within the past three years, Gerard Klauer Mattison & Co., Inc. was the manager (co-manager) of a public offering of the securities of this company and/or has performed other banking services for which it has received a fee. o ISSI reported 4QF00 (Sept.) EPS of $0.41 versus $(0.03) and our $0.36 estimate. Sales of $50.1 million were ahead of our $45.5 million estimate and were up 30% sequentially. Business was strong throughout the quarter, with prices generally stable and orders remaining strong. We reiterate our BUY rating. o Gross profit margins were 33.4% versus 32.0% in the prior quarter and 24.0% last year. With revenue expected to increase, we believe there is potential for margin improvement throughout FY2001, but the company is being conservative at this point. ISSI has been subject to some wafer price increases from TSMC and the effects will roll through the next two fiscal quarters. We also expect pricing to increase modestly. Margins improved in the quarter due to increased units and a better product mix. ISSI's expenses were in line with our estimates. R&D and SG&A were about 11% and 10% of 4Q revenues, respectively. In 2001, we expect that R&D and SG&A will each approximate 10% of revenues. o Profitability remains strong at ISSI-Taiwan, NexFlash and WaferTech. ISSI's "Equity in Net of Affiliate Companies" netted $3.69 million in the quarter, down from $4.15 million last quarter. While performance at the affiliated companies in 4Q00 was extremely strong, ISSI-Taiwan had an exceptional month of June (which the company warned would be a one-time event), which made sequential comparisons difficult. Compared to ISSI, ISSI- Taiwan has more of a DRAM and commodity SRAM focus. We expect ISSI's subsidiaries to maintain their high level of profitability into FY01. o Strong ramp in new products should help drive revenue growth. ISSI's 8 Mb No-Wait SRAMs are ramping well to networking customers. The product was introduced in January on a 0.25-micron process at prices ranging from $23.45 to $26.45. By the end of the year, we expect ISSI to begin shipping 0.15- micron devices. We expect a quick transition from its 0.18-micron process technology as TSMC rapidly moves to 0.15 and eventually 0.13-microns. o ISSI's strong relationship with TSMC and Chartered Semiconductor should enable it to procure necessary capacity. With tighter capacity, ISSI is raising prices quarterly, with increases in the mid single-digit category in its SRAM business. As mentioned, TSMC raised wafer prices which will ISSI's affect margins in the next two fiscal quarters. ISSI is currently booked out for this December quarter and is now taking orders for its March quarter, indicating continued, strong demand. o TSMC will use ISSI's SRAMs to drive 0.13-micron process technology development. Typically, foundries use SRAMs to initially develop new process technologies. ISSI announced that TSMC will use its SRAMs to develop the leading-edge 0.13-micron process technology. ISSI also has similar agreements with Chartered Semiconductor to help develop the 0.18-micron and 0.15-micron process technologies. The decision of these foundries to use ISSI's technology demonstrates the strength of ISSI's relationships with its foundry partners as well as the strength of its technology. o ISSI's product line is about 75% SRAM (mostly high-speed), 20% low- density DRAM and 5% other. DRAMs typically have been the lowest margin category. The US market generated approximately 52% of revenue, with Europe at 22% and Asia at 26%. o Balance continues to be strong. ISSI has $97 million in cash and short- term investments on its balance sheet, and carries essentially no debt. Inventories increased slightly in the quarter by $4.4 million sequentially. Essentially, ISSI is attempting to keep sufficient inventory on-hand as foundry capacity has remained tight. o Significant value in equity investments in ISSI-Taiwan and WaferTech. Currently, ISSI owns a 43% stake in ISSI-Taiwan, which is planning to go public on the Taiwanese stock exchange in the fourth quarter of 2000. We believe the company's holdings in ISSI-Taiwan could be worth about $140 million after an initial public offering. The hypothetical net profit to ISSI could be roughly $100 million, or $4 per share. Also, we value ISSI's stake in WaferTech -- a foundry joint venture with TSMC, Altera and Analog Devices that plans to go public in 2000/2001 - at several dollars per share. o Raising FY01 EPS estimates, establishing preliminary FY02 EPS estimates and lowering price target to $50 from $60. As a niche player in the SRAM and low-density DRAM markets, ISSI should grow revenues at about a 70% CAGR over the next two years, in our opinion, driven by increased unit sales and improved product mix and pricing. Profitability has increased nicely in the reported quarter (4QFY00), with EPS of $0.41 versus ($0.03) last year. We are raising our FY01 EPS estimates to $1.97 from $1.90 and establishing a preliminary FY02 EPS estimate of $2.40, given higher revenue and GPM assumptions and improved profitability at its subsidiaries. Expenses should remain in line with previous estimates. Based on our preliminary FY02 EPS estimate of $2.40, we are lowering our price target to $50 from $60, using a more conservative target P/E multiple of 23x and a discount of 10 % to the market multiple. INVESTMENT CONCLUSION Raising estimates and lowering price target; reiterate BUY rating. We believe ISSI will experience a sharp EPS recovery. We are raising our FY01 to $1.97 from $1.90 and initiated a FY02 EPS estimate of $2.40. We believe these numbers are readily achievable. Compared to its peer group, ISSI still trades at a discount. We have adjusted our price target to $50, based on our preliminary FY02 EPS estimate of $2.40 and about a 10% discount to the S&P 500 market multiple of 23x.