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Technology Stocks : C-Cube -- Ignore unavailable to you. Want to Upgrade?

To: John Rieman who wrote (50494)	12/15/2000 8:30:23 PM
From: Manuel Vizcaya	Read Replies (1) \| Respond to of 50808

Here is part of the research report from RS's Arun Veerappan. · C-Cube Microsystems held a conference call yesterday to provide an update on the current quarter (Q4:C00) and guidance for C2001. For Q4, the company reaffirmed its earlier guidance of $74 million in revenues and EPS of $0.15. For Q1:C01, the company guided for $61 million in revenues and $0.07 in EPS. Finally, for C2001, the company is expecting $321 million in revenues and $0.65 in EPS. · The company’s Q4:C00 expectations for both the top and bottom lines were in-line with what we were looking for. However, its revenue guidance for Q1:C01 of $61 million represents a 17% Q-Q decline from our Q4:C00 projections and is $10 million lower than our previous $71 million revenue forecast for the quarter. The lowered forecast for Q1:C01 can be largely attributed to an anticipated substantial decline in VCD sales in Asia, combined with an inventory correction relating to products in its expansion platform businesses (i.e., DVD, STB, and codecs). The company’s C01 guidance of $321 million in revenues and $0.65 in EPS is based on a sharp re-acceleration in expectations for the company’s expansion platform businesses. · We are maintaining our estimates for Q4:C00, but are lowering our expectations for C01 revenues and EPS to $291.5 million and $0.43, respectively. While we believe that the company could potentially execute to deliver on its revenue guidance for C01, we are adopting a more conservative approach in our modeling in order to reflect a slower economic environment for consumer products in 1H:C01 and in order to provide the company with the opportunity to execute to a more reasonable set of financial estimates going forward. While we recognize that the near-term business environment has slowed, we are maintaining our rating on C-Cube stock due to what we view as the inherent value and positioning of the company’s core digital video technology. As indicated in their call, C-Cube expects a sharp re-acceleration in Q2:C01 revenues from expansion platforms as sales to DVD and STB markets regain strength. [obvious they don't believe this] ]However, we have decided to take a more conservative view and are modeling for slower, but nevertheless, solid, re-acceleration of revenue growth in the company’s expansion platforms. In effect, we are setting a more reasonable bar for the company, in our view. Gross margins are also expected to decline as a result of two main factors: 1) start-up costs associated with production ramp in a new geometry (0.18-micron) at their fab and 2) lower expectations for revenues derived from the company’s linear editing business, which typically enjoys high margins. We are taking the company’s guidance for gross margins at face value as they have better insight into their own cost structure, and are therefore modeling a decline in gross margins from 55% in Q3:C00 to approximately 50% in Q3:C01. In summary, given that we are entering C2001 at a lower-than-expected revenue run-rate, and given our lowered forecasts for next year combined with the company’s view of a more difficult business environment, we are lowering our revenue estimates for C01 from $319.6 million to $291.5 million and lowering our EPS estimates from $0.65 to $0.43. While we recognize that the near-term business environment has slowed, we are maintaining our rating on C-Cube stock due to what we view as the inherent value and positioning of the company’s core digital video technology. Specifically, we refer to the company’s core digital video technology (encoding, decoding and codec ICs) and understanding of the video markets from a system-level perspective. We point to the fact that at closing yesterday ($17.38 price/share), C-Cube commanded a market value of approximately $930 million. We also point to the fact that the company is expected to report $265 million in revenue and $0.53 in EPS for C00. In comparison, Broadcom a (BRCM, $117.25) purchased a C-Cube competitor for approximately $1 billion. While this competitor, VisionTech, does have some critical design wins at some digital video system OEMs, we believe that in terms of technology, products or revenue (VisionTech is a start-up), C-Cube is substantially ahead. Hence, we believe that despite the tough near-term business dynamics at the company, investors will recognize the franchise value of C-Cube and its technology.