Michael,
They were essentially downgraded by First Union. I like this company, but it just set a new 52 week low and broke a strong support level. Quad bottom break at 20.
The cash level might be a bit low also given their burn rate, especially if it continues to be ugly on the demand side. They don't seem to be seeing any effects yet except on the wireless side.
********************************
First Union Securities Covers EMKR
08/10/01 08:21 AM
Source: First Union Securities
Company Notes:
Visit the CNET Brokerage Center for daily reports from the top Wall Street analysts.
EMCORE Corporation (EMKR-NASDAQ)
Target Price Change
Q3 2001 Results In Line--Lowering Target Price And Estimates
Rating: 2
Price: $21.00
52-Wk. Rng.: $60-20
Shares Out.: (MM) 34.5
Market Cap.: (MM) 724.5+
Key Points
Emcore reported Q3 2001 revenue of $52.9 million or 10% sequential growth (versus our estimate of $52.1 million) and a loss of $0.05 (versus our estimate of a loss of $0.08).
Backlog during the quarter was $140 million versus $155 million last quarter. Although the upside during the quarter was driven by systems revenue, systems backlog decreased to $75 million from $104 million last quarter. Materials backlog increased to $65 million from $51 million last quarter. VCSELs book-to-bill was 3:1, solar cells was above 1, and RF materials was below one.
The fiber optic business grew 35% sequentially to approximately $5.5 MM, slightly below our estimate. Although production ramp is going well, we believe our original estimates for next quarter and F2002 are too aggressive. Our revised estimates for next quarter and F2002 are $7.0 MM and $55.3 MM respectively (versus our old estimate of $9.8 million and $75 million).
We are lowering F2001 and F2002 revenue and EPS estimates to reflect defered systems revenue (SAB101 accounting rule), decrease in systems backlog, and revised materials revenue. Our new F2001 revenue and EPS estimates are $188.0 MM and a loss of $0.27 (versus our old estimate of $196.3 MM and a loss of $0.22). For F2002, our new revenue and EPS estimates are $200.7 MM and $0.10 (vs. old estimate of $273.8 MM and $0.45).
Although we are disappointed with the magnitude of this downward revision, a downgrade at this level does not make sense to us based on a sum of the parts analysis. We believe a higher stock price, perhaps substantially higher, is likely in the next 12 to 18 months. Lowering price target from $45 to $28 based on a very conservative sum of the parts analysis (see page 3). Maintain buy rating.
Company Description
EMCORE is a vertically integrated compound semiconductor manufacturer with products for the telecommunications, wireless, satellite and consumer electronics markets. Products include Metal Organic Chemical Vapor Deposition (MOCVD) reactors, Radio Frequency (RF) materials, high-efficiency satellite solar cells, and Vertical Cavity Surface Emitting Lasers (VCSELs). Additionally, the company formed joint ventures with General Electric and Uniroyal. Representative customers include Agilent, AMP, Boeing, General Motors, Hewlett Packard, IBM, JDS Uniphase, LG Semiconductor, Lucent, Motorola, and Texas Instrument.
Quarterly Highlights
Revenue and EPS Results. Emcore reported Q3 2001 earnings that exceeded our estimates on the top and bottom line. Revenue of $52.9 million or 10% sequential growth was above our estimate of $52.1 or 8.8% growth. EPS was a loss of $0.05 versus our estimate of a loss of $0.08.
Backlog during the quarter was $140 million versus $155 million last quarter. Although the upside during the quarter was driven by systems revenue, systems backlog decreased to $75 million versus $104 million last quarter. Materials backlog increased to $65 million compared to $51 million last quarter. Emcore did not have a 10% plus customer during the quarter.
Material Revenue Breakdown.
Fiber Optics. The fiber optic business, which includes the VCSEL-based technology, grew 35% sequentially to approximately $5.5 million, slightly below our estimate. Although production ramp is going well and demand is strong, we believe our original estimates for next quarter and F2002 are too aggressive. As a result, we are revising our estimates downward for next quarter and F2002. Our new estimate for next quarter is $7.0 million versus our original estimate of $9.8 million. For F2002, our new estimate is $55.3 million versus our original estimate of $75 million. During the quarter, VCSELs book-to-bill was 3:1. Agilent was the largest customer.
Solar Cells. Revenue from Solar Cells came in at approximately $5.0 million, essentially in line with our estimate. Emcore indicated that Solar Cells production is fully booked through March 2002. We believe visibility is solid and therefore, we are raising our revenue estimate for F2002 from $21.7 million to $25.1 million. Pricing in the solar cells business is relatively stable. Emcore™s largest customer for solar cells is Loral.
RF Materials. Revenue from RF materials declined approximately 40% sequentially to $3.5 million (versus our estimate of $3.7 million) due to a shutdown of a Motorola facility during the month of June. We believe there is limited visibility going forward and as a result, we are revising our F2002 revenue estimate downward from $27.5 million to $15.7 million. We expect that revenue from RF materials will be flat to slightly down in Q4 2001 compared with this quarter. Emcore is experiencing enormous pricing pressure in this business. Motorola accounted for over 10% of RF Material sales.
Systems Revenue
In addition to lowering our estimates for the materials business, we are lowering our forecast for systems to reflect the new accounting rule (SAB101), decreased backlog and current market conditions. SAB101 requires Emcore to defer the installation portion of revenue, which is approximately 10% of the sale price. This equates to approximately $4 million in revenue for next quarter. Lead times have decreased to about 4 to 5 weeks while sales cycles are lengthening. Given the softening capital equipment market, we do not believe historical growth rates are sustainable. For F2002, our new estimate is $104.6 million versus our original forecast of $145 million. Emcore did not have a 10% customer in this business during the quarter.
Margins. Gross margins of 41.4% were essentially in line with our estimate of 41.3%. As product mix becomes more heavily weighted toward fiber optic revenue, we expect gross margins to trend upward. We are forecasting gross margins to reach approximately 42.5% by the end of F2002.
R&D expenses were $13.9 million or 16.3% of total revenue. Next quarter, we expect R&D to decrease slightly in absolute dollars. Emcore is tightening R&D expenses going forward and as a result, we expect R&D to decline by approximately $10 million in F2002.
SG&A expenses of $7.1 million were approximately $1.0 million below our estimate. Going forward, we expect SG&A to increase slightly in absolute dollars on a sequential basis.
Joint Ventures Update. During the quarter, Emcore sold its ownership in the Uniroyal Optoelectronics joint venture back to Uniroyal (UTCI). The company received 2 million shares of UTCI from this transaction. Emcore is expected to report a gain of $10 million from the deal in FQ4 2001. Emcore will continue to supply MOCVD equipment to Uniroyal Optelectronics.
Balance sheet results. DSOs were 49 days versus 48 days last quarter. Inventory turns were 2.3x versus 2.6x last quarter. We expect inventory turns to improve next quarter.
Valuation
Although we are disappointed with the magnitude of this downward revision, a downgrade at this level does not make sense based on a sum of the parts analysis. We believe a higher stock price, perhaps substantially higher is likely in the next 12 to 18 months. By assigning a conservative revenue multiple to CY2002 revenue forecasts for each segment of the business, we arrive at a price target of $28 per share.
Additional information available upon request.
First Union Securities, Inc. maintains a market in the common stock of EMKR.
The (an) author(s) of this note/report has(have) a long position in the securities of EMKR.
This is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. Interested parties are advised to contact the entity they deal with, or the entity that has distributed this report to them. The information has been obtained or derived from sources believed by us to be reliable, but we do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute our judgement as of this date and are subject to change without notice. First Union Securities, Inc. (icFUSIle), or its affiliates may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. First Union Securities, Inc., may from time to time perform advisory or other investment banking services, or solicit investment banking or other business from issuers mentioned in this report. FUSI is a subsidiary of First Union Corporation and is a member of the NYSE, NASD and SIPC. Copyright © 2001 First Union Securities, Inc. FUSI is a separate and distinct entity from its affiliated banks and thrifts.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE |
