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Technology Stocks : Vitesse Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: JB who wrote (4290)	5/2/2003 4:35:20 AM
From: mopgcw	Read Replies (1) \| Respond to of 4710

Wachovia take on the q: WACHOVIA SECURITIES April 22, 2003 VTSS: In-line FQ2, Modest Growth, Maintaining Market Perform Company Note Vitesse Semiconductor Corp. (VTSS- Stock Rating: MARKET PERFORM Karl Motey / (415) 490-1208 Niraj Patel / (415) 490-1211 Key Points * Reported in-line FQ2 results. Revenue of $40.2M flat q/q and a loss per share of $0.05 in-line with our/consensus estimates of $40M and a loss per share of $0.05. Management is guiding FQ3 revenue growth of about 7-8% q/q growth (versus consensus estimates of $42.7M or 6% q/q). * Growth across Storage, Metro, Enterprise. Storage revenue was up 8.6% q/q to $20.2M, driven by continued momentum with its 2GB FC switches. Metro was up 7.6% q/q to $7.1M with design win ramping. Enterprise was up 4.7% q/q to $8.9M. Long haul core revenue declined 11% q/q to $4.0M. * Modest growth in the June quarter. Management expects sustained growth across its storage, metro, and enterprise segments in FQ3, behind continued momentum in metro (up 15% q/q), storage (up 7.5% q/q) and enterprise (up 6% q/q). * Maintaining 2003 estimates. We are maintaining our FY03 estimates of $168.2M and ($0.19). We are introducing our FY04 estimates of $231.5M and $0.03, modelling break-even in CQ4 2003 at revenue level of $53M. * Maintaining our Market Perform rating. We continue to rate shares of Vitesse Market Perform given the company's sluggish growth in its long-haul business, the high turns environment, and a highly competitive market exposure. Valuation Range: $2.50 to $3 Currently VTSS is trading at a discount to our coverage group, at an enterprise value/2003 sales of 2.8x vs 3.8x. We anticipate that the stock will trade in a range of $2.50-3.00, based on 2.6-3.2x enterprise value /2003 sales. Risks include pricing pressure and extended sluggishness in the company's end markets. Investment Thesis Vitesse remains a primary comm IC supplier for the telecom market, while continuing to penetrate the storage and datacomm markets. On the basis of weak fundamentals for comm IC suppliers and limited visibility, we maintain our Market Perform rating on the shares of VTSS. Discussion Reported in-line FQ2 results Revenue of $40.2M flat q/q and a loss per share of $0.05 in-line with our/consensus estimates of $40M and a loss per share of $0.05. Management is guiding FQ3 revenue growth of about 7-8% q/q growth (versus consensus estimates of $42.7M or 6% q/q). Gross margin was 52.1%, sequentially up due to increased revenue growth and steady ASPs. As expected, operating expenses for the quarter were sequentially down to $37.6M (from $38.9M), with R&D of $23.5M (from $24.5M) and SG&A of $14.1M (from $14.4M). In FQ2 one customer accounted for 10+% of sales, EMC. Growth across Storage, Metro, Enterprise Storage revenue was up 8.6% q/q to $20.2M, driven by continued momentum with its 2GB FC switches. Metro was up 7.6% q/q to $7.1M with design wins ramping across several major equipment OEMs (i.e. Lucent). Enterprise was up 4.7% q/q to $8.9M. Long-haul core revenue declined 11% q/q to $4.0M. On the product front, the company’s 2.0GB Fibre Channel Switch IC targeting embedded storage area network (SAN) applications including RAID Controllers, Switches and SBODs (Switched Bunch Of Disks), continues to gain momentum in the storage market. In the metro segment, management remains enthusiastic behind its OC-48-192 SONET framer, citing design win rates of 60-70% against the competition (i.e. AMCC, PMCS) over the last 12 months. Modest growth in the June quarter Management expects sustained growth across its storage, metro, and enterprise segments in FQ3, metro (up 15% q/q), storage (up 7.5% q/q) and enterprise (up 6% q/q). We are maintaining our FY03 estimates of $168.2M and ($0.19). We are introducing our FY04 estimates of $231.5M and $0.03, modelling break-even in CQ4 2003 at revenue level of $53M. Book:bill up, turns remain high Management noted increased visibility, citing an improvement in its customer forecasts as opposed to an increase in order lead times. While Vitesse’s book:bill increased to 1.10 in FQ2 (from 1.07), turns remain high. According to our estimates, we believe about 42% turns business is required to meet its FQ3 guidance. Balance Sheet analysis Vitesse’s cash balance declined to $233M (from $247M) and debt declined to $195M (from $201M), resulting in a net cash per share of $0.19. Cash usage from operations was about $13M, above management’s expectations of $10-11M due to an increase in inventory purchases (concentrated orders for its multi-channel storage transceiver in April). Inventories were up to $32.2M (from $29M). DSOs declined to 79 days from 84 days. DOI declined 166 days from 167 days. Maintaining our Market Perform rating We continue to rate shares of Vitesse Market Perform given the company’s sluggish growth in its long-haul business, the high turns environment, and a highly competitive market exposure. Currently VTSS is trading at a discount to our coverage group, at an enterprise value/2003 sales of 2.8x vs. 3.8x. We anticipate that the stock will trade in a range of $2.50-3.00, based on 2.6-3.2x enterprise value /2003 sales. Risks include aggressive pricing and extended sluggishness in its end-markets.