From Briefing.com: Tech investors greeted the new year with optimism after the ISM index rose a better than expected 3.4 points to 66.2 for December, surpassing the record 62.8 reached in November. New orders hit a 20 year high at 77.6. As with economic data released earlier in the week, tech investors were encouraged but not energized by the news. Trading mirrored Wednesday's action, with investors taking profit in large cap tech and buying growth / better value in smaller tech. Large cap tech opened the day higher, slipped into negative territory after fifteen minutes and sold off in the final two hours of trading. At the close, the Philadelphia Semiconductor Index (SOXX 504.85 -3.27) ended down 0.64% while the Briefing.com Tech Index (BTI) closed up 1.2%. Decliners outnumbered advancers 1.6:1 on the SOXX, with decliners slipping 1.0% and advancers gaining 1.9%. This compares against BTI companies, where advancers outnumbered decliners 1.8:1, with advancers rising 3.3% and decliners sliding 2.1%. The Nasdaq Composite (IXIC 2006.68 +3.31) gained 0.17%.
Agere Systems (AGRA 3.10 +0.05) announced the company acquired TeraBlaze, a privately held developer of GbE (Gigabit Ethernet) switching solutions for equipment providers addressing SOHO (small office, home office) and enterprise applications. Please visit the Story Story page for our assessment of the acquisition and investment summary.
Looking ahead, Extreme Networks (EXTR 7.31 +0.10) reports Q2 results before the open on Monday. Reuters Research pegs consensus EPS at ($0.03) on revenue of $83.01MM. Infosys Technologies (INFY 99.30) reports Q3 results before the open on Thursday. Consensus is at $0.51 on $262.44MM. On the economic front, look for 1) December Auto Sales and November Construction Spending on Monday, 2) November Factory Orders and December Non-Manufacturing ISM on Tuesday, 3) Weekly Initial Unemployment Claims, November Wholesale Inventories and November Consumer Credit on Thursday; and 4)December Nonfarm Payrolls and Earnings Data on Friday.
We remain moderately bullish on technology shares over the long-term. Shares are likely to be volatile given generally high valuations. We would take advantage of the volatility to buy into quality, attractively priced names / sell richly priced shares into strength as part of a rebalancing of the tech portion of the portfolio to a neutral market weight. Please visit the Story Stocks and Daily Sector Wrap pages for the latest thinking on investment opportunities across market sectors, and the Page One, Looking Ahead and Economic Briefing pages for broad market perspective and outlook. For active investors and traders, visit the In Play, Swing Trader, and The Technical Take pages for actionable ideas.
Have a great weekend.--Ping Yu, Briefing.com
Group % Change Avg % Change Advancers Avg % Change Decliners Ratio Advancers to Decliners *P/SG Ratio: Advancers *P/SG Ratio: Decliners
Philadelphia Semiconductor Index -0.6% 1.9% -1.0% 0.6:1 3.8 4.5
Briefing.com Tech Index(based on a composite of over 1000 tech companies) +1.2% 3.3% -2.1% 1.8:1 1.7 1.7
Audio & Video Equipment +1.0% 2.3% -1.5% 2.4:1 0.3 0.6
Communications Equipment +1.7% 3.8% -2.0% 1.9:1 1.8 1.8
Communications Services +2.2% 3.7% -1.5% 2.7:1 1.0 1.2
Computer Services +1.7% 3.9% -2.0% 1.9:1 2.1 1.5
Computer Sys & Peripherals +1.0% 2.5% -2.4% 2.6:1 1.3 1.7
Electronic Instruments & Controls +0.9% 3.3% -2.6% 1.5:1 1.4 1.1
Scientific & Technical Instruments +1.2% 3.9% -1.5% 1.2:1 1.3 1.0
Semiconductors +0.6% 2.4% -1.7% 1.3:1 2.2 3.3
Software & Programming +0.8% 3.0% -2.5% 1.5:1 1.8 1.6
*P/SG Ratio: (Price / Sales) / Sales Growth.
4:05PM Weekly Wrap :
With the New Year's holiday on Thursday, trading conditions this week were again on the light side of things. Like last week, though, a bullish bias prevailed and the indices established new 52-wk highs during the week. Having done so, they completed an astounding year on Wednesday that saw the Nasdaq, Russell 2000, S&P 400, S&P 500, and Dow gain 50.0%, 45.4%, 34.0%, 26.4%, and 25.3%, respectively.
As for the week itself, the bulk of the market's gains occurred on Monday when the indices, in what has become a familiar pattern, rallied on essentially no news of note. The remainder of the week played out in mixed fashion for the broader market, but noticeably, sellers never applied any concerted pressure.
Frankly, sellers didn't have much reason to force the action. Outside of some specific reports, such as the earnings warning from AmerisourceBergen (ABC), there wasn't any news this week that was worrisome enough to undermine the market's bullish momentum.
Some might argue with the latter characterization, knowing that the Chicago PMI, Consumer Confidence, and Existing Home Sales reports on Tuesday all came up shy of consensus estimates. That point notwithstanding, it wasn't lost on the market that each report, in its own right, didn't do anything to alter the view that economic activity is running at an encouraging pace, even if the red hot housing market is cooling off a bit. To that end, the December ISM Index on Friday, which checked in at a much stronger than expected 66.2 (consensus 61.0), topped the 20-yr high for that index that was reported for November.
The ISM number, it so happens, did a number of sorts on the Treasury market, which got clobbered in its wake as the strength boosted expectations for a near-term tightening in Fed policy. You wouldn't think as much, though, looking at the currency market. Although the dollar got a bit of a boost when the ISM headlines crossed the wires, support was short-lived. When the stock market closed on Friday, the greenback was down against the yen and euro from where it closed on Thursday. The same can be said for the dollar's weekly performance.
Within the stock market, the losers of note from an industry perspective were limited. A profit taking bid was evident, however, in some of the market's stronger performers of late, namely the steel, aluminum, brokerage, oil drilling, retail, and homebuilding sectors. The latter was undercut by the existing home sales report as well as the backup in rates that saw the yield on the 10-yr note jump 23 basis points on the week to 4.38%.
Strikingly, the pharmaceutical group, which underperformed in 2003, helped pace the broader market's gains this week, along with the telecom, insurance, managed care, restaurant, tobacco, and semiconductor stocks.
In the week ahead, it will be back to business as usual as offices on Wall Street and Main Street alike are re-populated with returning vacationers. Although it may take some time for everyone to settle into their roles again, things should be back in full swing come Thursday when the retailers check in with their same-store sales results for December and Alcoa (AA) kicks off the official Q4 reporting period with its earnings report after the close. There will be no rest for the weary at that juncture either as the December employment report hits the market before the open on Friday.
We should add, too, that several Fed officials, including Alan Greenspan, will be speaking on the the topic of monetary policy over the course of the next week. The Fed Chairman starts things off with a presentation on risk and uncertainty in monetary policy on Jan. 3 before the AEA in San Diego. His speech on the matter could serve as a potential catalyst for trading action on Monday. As things stand now, though, fundamentals with respect to interest rates, the economy, and corporate profits continue to work in the stock market's favor and continue to support our moderately bullish long-term outlook.-- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 10324.67 10409.85 85.18 0.8 % -0.4 %
Nasdaq 1973.14 2006.68 33.54 1.7 % 0.2 %
S&P 500 1095.89 1108.49 12.60 1.1 % -0.3 %
Russell 2000 554.96 560.85 5.89 1.1 % 0.7 %
2:44PM Agere Systems (AGRA) 3.11 +0.06: Before the open, Agere Systems announced that it acquired TeraBlaze, a privately held developer of GbE (Gigabit Ethernet) switching solutions for equipment providers addressing SOHO (small office, home office) and enterprise applications.
AGRA acquired Terablaze on December 31, 2003 for approximately 6.92MM shares of Class A common stock valued at about $21MM. Excluding the impact of approximately $12-14MM for in-process R&D charges, the acquisition is expected to have negligible impact on earnings for F04 (less than $0.005 per share); any impact will be offset by ongoing cost reduction initiatives.
AGRA acquired Massana, a privately held provider of GbE PHY (physical layer) device solutions in August. The company is leveraging Massana's PHY technology to deliver a range of GbE products, from single- to multi-port network interface cards and LAN-on-motherboard devices for computers, servers and Ethernet switches. AGRA announced today a GbE single port device based on Massana's TruePHY and 0.13µm technologies, the lowest-power PHY in the industry, and plans to introduce multi-port products by mid-2004.
Market Opportunity
IDC (International Data Corporation) estimates the market for Ethernet ICs (integrated circuits) to grow to $2.5B by 2005 with the GbE silicon segment posting a compound annual growth rate of 37% from 2002 to 2005.
Market research firm In-Stat/MDR forecast the GbE PHY ICs market to exceed $1B in 2006.
IDC projects that the GbE switch ASIC/ASSP market to total more than $500MM in 2004, and more than $850MM in 2007. The Dell'Oro Group estimates that the GbE switch market, into which AGRA will sell the integrated switching solutions, to total over $12B in 2004.
Competitive Position
Technology. Over 5,600 U.S. patents and patent applications. Strong IP (intellectual property) and competitive position. Company ranks:
Storage: #1 in HDD ICs, #1 in SoCs/RC and #1 in Preamps;
PC Connectivity: #1 in Notebook modems, #2 in Overall modems and #3 in 802.11 chipsets;
Mobile terminals: #3/4 in GPRS/EDGE/UMTS
Wireline: #1 in SONET/SDH Framing, #1 in E/T Mapping, #1 in Traffic Management and #3 in Communications ASICs;
Wireless: #1 in DSPs for Wireless Infrastructure, #1 in Traffic Management and #2 in Overall in Wireless Infrastructure ICs.
Financial. Sizeable long-term debt balance but overall improving balance sheet. Quick ratio of 1.0:1. Current ratio of 1.2:1.
Cost Competitiveness. Ongoing restructuring initiatives to yield substantial manufacturing and operating efficiencies.
Customer Base. Relatively concentrated revenue base. Three customers account for approximately 43% of sales. Table 2. Customers by Market Segment.Market Segment % of Revenue Applications Primary Competitors Top Ten Customers
Storage Products ~34% Read channels, disk controllers, pre-amplifiers, or preamps, and motor controllers. Infineon Technologies, LSI Logic, Marvell Technology Group, STMicroelectronics, Texas Instruments Maxtor Corp, Seagate Technology, Western Digital Corp
Mobile Phones ~19% DSPs (Digital signal processors) and CSPs (Conversion signal processors ). Philips Electronics, Motorola, QUALCOMM, Skyworks Solutions, STMicroelectronics, Texas Instruments Nokia, Samsung Electronics
Computing Connectivity Devices ~17% Input/Output products. Broadcom, Conexant Systems, Infineon Technologies, Philips Electronics, PCTel Apple Computer, Hewlett Packard
Wireless Local Area Networking Products ~6% Integrated circuits and network access cards. Broadcom, GlobespanVirata, Texas Instruments Lucent Technologies
Enterprise Networking ~7% Integrated circuits, software and reference designs. Broadcom, IBM, Intel, LSI Logic, Marvell Technology Group Cisco Systems
Wireline Communications Infrastructure ~5% Integrated circuits, software and reference designs. Applied Micro Circuits, Intel, Motorola, PMC-Sierra, Vitesse Semiconductor Lucent Technologies, NEC Corporation
Wireless Communications Infrastructure ~12% Integrated circuits, software and reference designs. Applied Micro Circuits, Intel, PMC-Sierra, Texas Instruments, Vitesse Semiconductor Nokia
Source: Company Reports.
Recent Performance
P&L Line Performance
Revenue Q4 (Sept) revenue increased 10.5% Y/Y to $504MM, driven by cell phones, hard disk drives and other PC-related applications.
% breakdown by market category:
Client markets revenue (~76% of sales) increased 15.5% Y/Y to $381MM, driven by demand for wireless terminals and PC-related products.
Infrastructure markets revenue (~24% of sales) dropped 23.6% Y/Y to $123MM. Demand still weak but stabilizing; management forecasting limited recovery in H2:04.
Gross Margin Gross profit grew 37.7% Y/Y to $16.303MM driven by improvements in Infrastructure markets partially offset by declines in Client markets.
Client markets gross profit declined 4.9% Y/Y to $135MM.
Infrastructure markets gross profit jumped 75.6% Y/Y to $79MM.
Gross margin improved 440 bps Y/Y to 42.5%.
Client markets gross margin declined 760 bps Y/Y to 35.4%.
Infrastructure markets gross margin jumped 3620 bps Y/Y to 64.2%.
Operating Margin Operating income improved Y/Y from ($14MM) to $40MM.
Client markets operating profit declined 29.4% Y/Y to $36MM.
Infrastructure markets operating profit jumped Y/Y from ($65MM) to $4MM.
Operating margin improved to 7.9% on manufacturing and operating efficiencies.
Client markets gross margin declined 610 bps Y/Y to 9.4%.
Infrastructure markets gross margin improved Y/Y to 3.3%.
SG&A expense increased 8.1% Y/Y; increased as a percent of sales by 70 bps Y/Y to 13.3%.
R&D decreased 23.0% Y/Y; declined as a percent of sales by 710 bps Y/Y to 21.2%.
Valuation
On an inverted DCF/EVA basis, assuming firm balance sheet management and steady Y/Y improvement to:
15% operating margin by F06, AGRA's valuation implies that the company must grow revenue in the low 20% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
20% operating margin by F06, AGRA's valuation implies that the company must grow revenue in the high teens range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
25% operating margin by F06, AGRA's valuation implies that the company must grow revenue in the low teens range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
Consensus Y/Y growth for F04 and F05 is 13.7% and 13.3% respectively. On a price multiples basis, AGRA trades at 2.5x F04 revenue of $2.091B (+13.7% Y/Y) and 2.2x F05 revenue of $2.369B (+13.3% Y/Y); 51.8x F04 EPS of $0.06 and 20.7x F05 EPS of $0.15.
Summary
$21MM price is a bargain price for technology that positions AGRA to capture an early lead in GbE. By combining TeraBlaze's technology with Massana's TruePHY ™ family of GbE products, AGRA can deliver integrated PHY and switch solutions that will enable system manufacturers to deliver highly price competitive GbE products.
Company in transition but well positioned for growth and margin expansion. GbE is not the only growth driver. AGRA is aggressively pursuing emerging opportunities including voice-over-IP and media players. Strong IP/technology position, design win momentum across all divisions and geographies, and improving customer fundamentals position AGRA to grow revenue above industry rate for targeted markets:
Storage: Expanding portfolio from desktop to mobile, server and consumer.
PC Connectivity: Expanding to printing, imaging and media players.
Mobile Terminals: Designed in over 100 phone models.
Wireline: Designed in all top 10 wireline infrastructure OEMs; 3 of top 5 DSL OEMs; ATM chips designed into 40 OEMs globally.
Wireless: Designed in 8 of top 10 wireless infrastructure OEMs; ATM/NIC traffic processor in 2 of top 3 WCDMA NodeBs; entered RF PA market with products for every standard; positioned for market adoption of any standard.
The company is transitioning to a fab-light model; over 80% of wafers to be outsourced to foundry partners by 2005 vs. approximately 40% by 2004 and 10% pre 2000. Reduces capital investments / improves free cash flow. Expect gross margin leverage/expansion as volume increases.
AGRA is positioned to achieve above industry average revenue growth and operating margin beyond the 15% targeted by management. Shares are relatively pricey but given strong competitive position, improving financial position and building momentum, would initiate minor position at current level.--Ping Yu, Briefing.com
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