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Technology Stocks : VLSI Technology - Waiting for good news from NASDAQ !!! -- Ignore unavailable to you. Want to Upgrade?

To: DanZ who wrote (3189)	3/18/1998 9:14:00 AM
From: Wolverine	Read Replies (1) \| Respond to of 6565

MAXIMUM EXPOSURE AT VLSI TECHNOLOGY from SmartMoney Interactive, March 17, 1998 "AT A TIME when the Asia crisis has conspired with a slew of major preannouncements to shake Wall Street's confidence in corporate earnings, our Negative Revision Screen seems particularly timely (see recipe and screen results). It's designed to find companies beaten down temporarily by fleeting bad news. But what it tells you this time around is that the reasons for missed expectations in the current market are not as simple as ill winds from the Pacific Rim or a slowdown in a particular market like personal computers. Often, such factors only expose deeper problems with a company's business -- problems that can either create investment opportunities or signal the beginning of a longer-term decline. The difficult part for investors is figuring out which is more true. Take the case of VLSI Technology (VLSI), a 19-year-old bellwether in the integrated circuit business. If you looked at VLSI's stock over the past few months, you'd see what's becoming the classic Asia-related pattern -- down precipitously from October to early January, with little blips since then as investors try to evaluate what's really going on. Over that short period, the stock has spiraled from 36 to 18 and the company's multiple has settled at 13 times projected 1998 earnings. That's a deep discount to both the industry average and its own long-term growth rate. That certainly seems cheap. But the truth is more complicated. While VLSI's immediate troubles are certainly Asia related -- and therefore transitory -- the crisis highlighted a crucial weakness that may take much longer to mend: namely, overdependence on a single, well-heeled customer. When VLSI preannounced in late February that first-quarter earnings would be substantially below analysts' estimates, it acknowledged that Swedish phone giant Ericsson (ERICY) -- which accounts for roughly 28% of the company's revenue -- had canceled a contract for cellular phone chipsets worth $15 million this year and perhaps $15 million more in 1999. If that wasn't bad enough, analysts are also worried that an Asia-inspired slowdown in global handset sales will trim VLSI's other Ericsson-related growth. "Having a big customer like Ericsson is a double-edged sword," says Hambrecht & Quist analyst Robert Chaplinsky. "When that customer has hard times, it's going to be even harder on the vendor supplying them." The Asia factor will eventually dissipate. The longer-term issue is that analysts think Ericsson is jerking VLSI around with the contract issue -- largely because it can. While analysts say the proximate cause of the order cancellation was VLSI's failure to meet "electromagnetic interference" requirements for the Ericsson product, most of them think the phone company is really just trying to broaden its supplier base -- always a good policy -- by giving business to others, like Texas Instruments (TI). That leaves VLSI vulnerable and badly in need of a new overall strategy. Clearly, VLSI needs to diversify its business. Nobody expects that its relationship with Ericsson, which brings in more than $150 million in revenues per quarter, is seriously imperiled. VLSI's cutting edge chipset for digital cellular -- the OneC GSM -- is too far on the cutting edge for that. Rather, the company needs to court other big customers like Nokia (NOK/A) and Motorola (MOT), while developing chipsets for other forms of digital cellular networks, including CDMA. It's possible VLSI could get interest from some Japanese or Korean handset manufacturers who are eager to compete in the market with Ericsson. Longer term, it needs to move quickly into other markets -- as it did a few years ago when it transitioned to the phone business from heavy dependence on making circuits for troubled microcomputer vendors like Apple Computer (AAPL) and Silicon Graphics (SGI). Deutsche Morgan Grenfell analyst Scott Nierenbiersky predicts VLSI will take a serious run at the local-area-networking market, where rival LSI Logic (LSI) holds sway. "It all boils down to whether there are opportunities to win new networking ports or to become a second source," to LSI, says Nierenbiersky. Already, he says, VLSI has won design-wins with Cisco (CSCO) and 3Com (COMS). VLSI executives say they poached an executive named Doug McBirney -- previously head of National Semiconductor's networking business -- precisely to show that the company is serious about competing against the likes of LSI, Lucent (LU) and National (NASM) for networking business. They also say they are busy staking out key, high-growth product areas in consumer electronics, such as satellite broadcast receivers, digital versatile disk (DVD) players, cable boxes and a variety of other high-volume, low-margin devices. The question is, can they pull it all off? The consensus on the Street is that VLSI has a strong enough engineering history to deliver the technology it promises in all of those areas. But whether it can rebuild the kind of sequential revenue growth that investors crave is an open question. There are those who insist a company trading at such a discount will eventually trade higher purely on the strength of its assets. But we'd say it's up to management to prove that this company is scrappy enough to reinvent itself in short order. As the Asia crisis exposes the real problems with more and more companies, the VLSI dilemma is one investors may be faced with over and over again." -- By Tiernan Ray