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Technology Stocks : Westell WSTL -- Ignore unavailable to you. Want to Upgrade?

To: P314159d who wrote (20995)	10/26/2000 1:12:02 PM
From: AK2004	Read Replies (1) \| Respond to of 21342

does that help? Regards -Albert 08:32am EDT 26-Oct-00 UBS Warburg (US) (Anton Wahlman) VRTA EFNT WSTL AWRE ADI VRTA: INVENTORY ISSUE AT WESTELL: DOWNGRADING TO BUY ******************************************************************************** UBS Warburg October 26, 2000 Anton Wahlman 212 821 3675 Jeffrey H. Susman 212 821 3458 Long Jiang 212 821 3676 Virata Corporation (VRTA - NASDAQ) - Buy US Semiconductors -------------------------------------------------------------------------------- Price: 32.88 Div: Nil Mkt Cap: 1.6b Est Debt/TC: N/A Price Tgt: 51.00 Yld: Nil Shrs O/S: 48m ROE: NMF 52 Week: 99.31 - 5 yr EGR: 60% Avg Vol(000): 1094 Ent Val: 1.2b 11.97 Est BV/Shr: 4.87 Cvt Secs: No -------------------------------------------------------------------------------- FISCAL YEAR QUARTERLY ESTIMATES - EPS FISCAL YEAR ESTIMATES - EPS 1stQ 2ndQ 3rdQ 4thQ Prior EPS P/E Rev(M) 03/99 -0.04A -0.42A -0.12A -0.08A F99A -0.66 NMF 9.3 03/00 -0.13A -0.17A -0.08A -0.03A F00E -0.40 -0.41 NMF 21.8 03/01 0.02A 0.13A 0.13E 0.13E F01E 0.35 0.41 NMF 178 03/02 0.13E 0.13E 0.13E 0.13E F02E 0.70 0.52 63.2 329 03/03 0.18E 0.22E 0.26E 0.31E F03E 1.32 0.97 33.9 536 VRTA: INVENTORY ISSUE AT WESTELL: DOWNGRADING TO BUY SUMMARY: While the positively preannounced quarter was obviously excellent, we believe the downside going forward at this point is that Westell was still 33% of revenue in the September, and by our calculations soon will be sitting on 660K- 790K chips in inventory. This we believe may lead to a very dry March quarter in this account for Virata. It would appear that this inventory issue takes away some of the upside potential in the next few quarters, and we are decreasing our EPS estimates also based on the company's uncharacteristically cautious guidance. While the stock will likely trade down today, we do believe that it will provide a good value for the 9-12 month perspective. Meanwhile, we are lowering our price target to $51 from $107. HIGHLIGHTS: * Virata reported a superb quarter which it had already positively preannounced a month ago. Yet we believe the stock will trade down significantly today. Why? Westell (WSTL-$6-Strong Buy) bought over 500K chips from Virata in the June quarter, almost 800K chips in the September quarter. Guidance also indicates that Westell will buy another almost 300K chips in the December quarter. In this case, each chip equals a modem. We estimate that Westell sold approximately 340K modems in the June quarter, under 300K modems in the September quarter, and may sell somewhere between 170K and 300K modems in the December quarter. This indicates some 660K-790K chips worth of inventory at Westell, which must be eaten into before the product becomes obsolete. It would stand to reason that Westell, which we estimate will ship 375K-500K modems in the March quarter and 470K-670K modems in the June quarter, could easily "sit out" a whole quarter's worth - the March quarter - of deliveries from Virata. We should also point out that the lower ranges in our Westell estimates above are the ones we actually have in our model - the higher numbers would be the upside we are hoping for. In other words, an inventory problem. * On the positive side, we believe Westell is also almost the only problem Virata has. Westell's problems stem directly from SBC's provisioning problems over the Summer, which in turn caused an inventory problem which hit Westell already in the September quarter. At the time, we were skeptical that this inventory problem would hit Westell so quickly and so dramatically. This time the numbers tell a qualitatively similar story for Virata, even if the magnitude is smaller - SBC was 60% of Westell's sales in June; Westell was 33% of Virata's sales in September. The one other measurable - but not nearly as significant as Westell - negative data point we see for Virata is Netopia (NTPA-$10-Buy). As we stated in previous First Calls, we believe there is a material risk that Netopia could fall short of our September estimates. Netopia reports on November 7, and Virata is the chip supplier. We estimate that Netopia is approximately 4% of sales. Netopia is heavily exposed to the D-CLECs, and we believe is unlikely to increase DSL revenue guidance going forward this time around. ANALYSIS: * In our model, we are trimming our long-term revenue estimates based on a slightly less aggressive trajectory, partially as a result of management's relatively cautious FY03 revenue growth guidance. Our FY02 and FY02 revenue estimates go from $340m and $600m to $329m and $536m, respectively. Coupled primarily with a lower gross margin outlook for chips, we are lowering our FY02 and FY03 EPS estimates from $0.70 and $1.32 to $0.52 and $0.97, respectively. For the next two quarters (December and March), we are actually increasing our EPS estimates from $0.11 and $0.11 to $0.13 and $0.13. This is flat from the September quarter just reported due to lower expenses, higher interest income and lower share count. An outlook of essentially a few quarters worth of flat EPS results is probably not what is going to send the stock up in the near future. * We are also of the belief that competition is going to heat up in several accounts over the next few months as new competitors announce integrated (Layer 1/2/3) products. While our survey over the last two weeks indicates that it will take probably a year for such new products to be designed in by the modem/router players, we should start to see announcements of these new products already in December by companies such as Globespan (GSPN-$80-Buy), Broadcom (BRCM-$218-NR), Centillium (CTLM-$26-NR), Texas Instruments (TXN-$43-NR) and possibly Intel (INTC-$41-Buy). Having said that, we also believe that Virata has a good market position in the layer 2/3 chip/software and will over time be one of the leading group of players in integrated layer 1/2/3 DSL chip solutions. It dominates this market today and has exposure to almost all relevant accounts, save for Efficient Networks (EFNT-$32-Buy), which we believe is an account that may be obtained soon. * We believe the stock will trade down on Thursday to a level which within a couple of quarters' time frame will prove to be a very attractive level. However, we believe it will take a couple of months before people will be willing to jump into the Virata story again, so for now we are downgrading the stock from a Strong Buy rating to a Buy rating. We are also decreasing our price target from $107 to $51, mostly because of the lower peer group multiples, however. It is based on 100x our CY02 fully taxed EPS estimate of $0.51.