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

To: David Lawrence who wrote (1922)	10/16/1998 8:29:00 AM
From: MoonBrother	Respond to of 4710

Analyst says the telecom inventory correction is over! ------------------------------------------------------ 06:48am EDT 16-Oct-98 BancBoston Robertson Stephens (Moosa, Elias 415-693-3418) Order Patterns Confirm Our Belief That the Inventory Correction Plaguing ... October 16, 1998 WE SEE INVENTORY CORRECTION AT AN END Order Patterns Confirm Our Belief That the Inventory Correction Plaguing Communications Device Companies May Have Ended Elias Moosa (415) 693-3418 elias_moosa@rsco.com Mark Edelen (415) 248-4688 mark_edelen@rsco.com Summary: In our view, the over-inventory dynamic that has constrained demand for communications devices for the predominant part of the past six months has indeed reversed in September. In our view, this is a positive for several companies in our universe including AMCC, Galileo Technology, Level One, PMC-Sierra and Vitesse. The corrective cycle began in April as our index of inventory days reached 76 days after the March quarter. The June quarter saw a sharp decline in our index to 66 days. We consider the range between 55 days and 60 days a steady-state level. We have been anticipating a decline into this range coming out of the September quarter. Early data points build a strong case for an end to the inventory correction and a resumption of a secular growth in device demand. An off-cycle report by 3Com in late September delivered a stunning drop in its inventories with a 22% sequential decline in overall inventories and a drop to 58 days from 75 days in the previous quarter. We anticipate that other OEMs, as they report their results, can confirm the trend at the system level. From a chip-level perspective, during its report, Motorola indicated that its chip sales into the networking market had powered a 5% sequential increase in its overall chip bookings after a long string of declines. Later, Linear Technology, a broad-based analog supplier, also pointed to the communications sector as an island of strength in a tough environement. In the past days, AMCC, Vitesse and PMC have all reported positive inflection points in bookings late in the September quarter. While we are pleased to call an end to this damaging cycle, we are quick to note that the end of the inventory cycle marks relief from a technical factor that has been constraining demand. A GDP related slowdown in spending for telco equipment could deliver a fundamental drag on demand, but we believe that evidence of such a slowdown is currently quite thin. Please reference our note from August 3, 1998 for a detailed discussion of our view on the dynamics behind the inventory correction. Figure 2: Communications OEM Inventory Trends Analysis: Q1:C96 Q2:C96 Q3:C96 Q4:C96 Q1:C97 Q2:C97 Q3:C97 [ Inventory 89 81 66 55 55 63 55 68 76 66 Days (DOI) Q-Q Growth: Revenue 12% 19% 6% 10% 2% 2% 8% -4% 2% 10% Inventory 29% 4% -10% -7% 5% 20% -6% 18% 16% -4% Inventory 14% -9% -19% -17% 0% 15% -12% 24% 11% -13% Days (DOI) Source: Bay, Cisco, Cabletron, 3Com, Ascend, PairGain, Cabletron, Fore Reports and BRS estimates.

To: David Lawrence who wrote (1922)	10/16/1998 8:31:00 AM
From: MoonBrother	Read Replies (1) \| Respond to of 4710

Analysts cheer on VTSS's qtr result ------------------------------------- 01:42am EDT 16-Oct-98 Needham & Co. (David Wong, Ph.D.) VTSS 4Q98: Strong Revenue Growth, Good Bookings Needham & Company, Inc. 445 Park Avenue, New York, NY 10022 (212) 371-8300 Equity Research Morning Note David Wong, Ph.D. 212) 705-0314 October 15, 1998 dwong@needhamco.com Ryl Ashley (212) 705-0406 Vitesse Semiconductor Corp. (OTC: VTSS) 4Q98: Strong Revenue Growth, Good Bookings Price (10/15/98): 24.44 Shares Outstanding (mil): 73.2 52 Week Range: $37.18 - 15.81 Market Cap. (mil): 1,789 Recommendation/Target: Strong Buy/$48 Average Daily Volume (mil): 2.22 9/97A 9/98E 9/99E 9/00E Old New Old New New Revenue (MM) 104.9 175.0 No Change 290.0 279.0 410.0 Op'g Margin 27.3% 32.1% 32.4% 33.8% No change 35.8% EPS: 1Q 0.08 0.13A 0.19 0.18 0.27 EPS: 2Q 0.10 0.15A 0.21 0.20 0.29 EPS: 3Q 0.12 0.18A 0.23 0.22 0.32 EPS: 4Q 0.13 0.20E 0.21A 0.25 0.24 0.34 EPS: Year 0.43 0.67E 0.67A 0.87 0.83 1.24 P/E Ratio 20.1 29.3 INVESTMENT OPINION * We are reiterating our Strong Buy Rating on Vitesse. Our six to 12 month price target is $48, a P/E of 39x our FY00 EPS estimate of $1.24. * Revenues and earnings in 4Q98 were in line with our estimates. However we are adjusting our FY99 revenue estimate from $290 million to $279 million and our FY99 EPS estimate from $0.87 to $0.83. This brings our estimates closer to consensus ($0.81). These new values represent FY99/FY98 revenue growth of 59% and EPS growth of 53%. HIGHLIGHTS * 4Q98 revenues of $54.0 were in line with our $54.0 million estimate and grew 17% sequentially from 3Q98 revenues of $46 million. Telecom chip revenues grew 21% sequentially, datacom 16% and ATE 9%. * EPS of $0.21 was slightly above our estimate of $0.20. * Bookings in the quarter were strong at a book to bill of 1.17 overall, 1.22 for telecom products, 1.21 for datacom products and 1.07 for ATE. * Six month backlog of $102.5 million is equivalent to about 5 months of revenue. The next quarter (1Q99) is thus already fully booked and Vitesse remains production limited. * The company reported that it has had no indications of weakening in its telecom end markets, contrary to fears in the investment community in recent weaks. We believe that the high end OC-48 fiber optic markets that Vitesse sells into have a much strong growth dynamic that older, copper based equipment.Results as expected. Table 1: Reported results vs our expectations for the quarter We Reported Expected Comments Revenues ($MM) 54.1 54.0 Good predictability because of EPS $0.21 $0.20 production limited business Gross Margins 61.2% 61.0% environment R&D ($MM) 8.5 8.6 SG&A ($MM) 6.3 6.6 Source : Company reports, Needham & Co. estimates As shown in table 1, results for 4Q98 were in line with what we expected. We believe that the production limited business environment created by the high demand for Vitesse's products, and the company's excellent record of manufacturing execution give Vitesse a lot of control over its financial results. We have lowered our FY 99 revenue and EPS estimates slightly to bring these closer to consensus numbers, in response to guidance from the company. Revenues grew sequentially by about 17%, facilitated by the smooth ramp of the new Colorado fab. The higher fab utilization resulted in higher gross margins, up 1.2 percentage points from the prior quarter. We expect gross margins to rise steadily as revenues grow. Excellent revenue growth and bookings Table 2: Revenue breakdown by product line $Millions 2Q98 3Q98 Seq. Comments Act. Act. growth Telecom 21.4 26 21% Demand for OC-48 WDM products Datacom 13 15.1 16% Growth in OC-12 and OC-48 ATM ATE 11.6 12.6 9% High end mixed signal testers Other 0.0 0.4 Total $46.0 $54.1 17% Source : Company reports, Needham & Co. estimates. Table 2 shows that the strongest revenue growth was in the telecom product line. Despite recent concerns in the investment community concerning possible weakening of telecom end markets, we believe that demand for high end optical fiber systems remains strong and will continue to grow over the next few quarters. Vitesse's telecom revenues, primarily for chips which go into OC-48 (2.5 Gb/s) systems), grew 21% sequentially with a strong book to bill of 1.22. Lucent is Vitesse's largest telecom customer, accounting for about 23% of total revenues in FY98. Ericsson and Alcatel are also important telecom customers, each at between 3 and 7% of total revenues in FY98. Datacom revenues grew 16% sequentially with a book to bill of 1.21. While fibre channel accounts for about half the datacom revenues, we believe that ATM and gigabit Ethernet were more important as growth drivers. Seagate is an important datacom customer, but the company has a relatively broad base of customers in datacom. With the recent increase in production capability, the Vitesse is getting to a point where it might be able to expand revenues by servicing second and third tier systems makers, whereas in the past the company has had to work hard just to meet the needs of its top tier datacom customers. ATE revenues also grew 9% sequentially with a book to bill of 1.07, despite what we believe to be widespread weakness in the chip testing market. The emergence of a need for high end memory testers in Rambus memory chips, and the ramp of new, high end mixed signal testers were some factors Vitesse cited as contributing to its ATE success in recent quarters. Schlumberger is an important ATE customer at 11% of total revenues in FY98. Teradyne is another significant customer at between 3 and 7% of revenues in FY98.

To: David Lawrence who wrote (1922)	10/16/1998 8:39:00 AM
From: MoonBrother	Respond to of 4710

Cheering continues ---------------------- 08:22am EDT 16-Oct-98 CIBC Oppenheimer (Dale R. Pfau 415-434-5871) VTSS VTSS: Great Quarter; Strong Growth to Continue P1-3 Part 1 of 3 CIBC Oppenheimer October 15, 1998 Telecom Infrastructure/Wireless Vitesse Semiconductor Dale R. Pfau (415) 434-5871 Great Quarter; Strong Growth to Lior Bregman (212) 667-7045 Continue Earl Lum (415) 434-5877 Investment Conclusion We continue to rate the shares of Vitesse a Rating: STRONG BUY Strong Buy with a 12 to 18 month target VTSS-OTC(10/15/98) $24 7/16 price of $45 to $50 per share. 52-week $37 3/16-15 13/16 Shares Out 79 Million The company reported another record quarter Float 68 Million Shares with net income of $0.21 per share on Market Cap $1.9 Billion revenues of $54.1 million. Earnings, gross Div/Yield Nil/Nil margins, and revenues were all at record Fiscal Year September levels and above our estimates. ( $0.20 per Book Value $4.25 per Share share on $53 million.) Consensus was $0.20 FY 1999E ROE 18.6% per share. LT Debt $0 Preferred Nil The book to bill was an impressive 1.17 with Com Equity $340 Million bookings in the telecommunications segment at 1.22. The company said it has seen strong demand across all business segments and sees no difference in the business Earnings per Share Prior Current climate today compared with 1 year ago. The FY 1998 $0.65 $0.67 company expects to continue to grow its FY 1999E $0.81 $0.83 telecom business at 65% to 70% in the next FY 2000E $1.19 $1.25 fiscal year. P/E Ratio Vitesse continues to have the most FY 1998 37.6X 36.5X strategically significant technology and FY 1999E 30.2X 29.4X market position of any company that we know. FY 2000E 20.5X 19.5X We believe that improving market share, technical superiority, and dramatically decreasing costs will keep Vitesse well ahead of any potential competition in an extraordinary growth segment. Company Description: Vitesse designs, develops, We are raising our estimate for FY1999 to manufactures and markets digital $0.83 per share on revenues of $276 million gallium arsenide integrated compared with our prior estimate of $0.81 circuits. It's products are per share on revenues of $262 million. We used in the high-performance note that the tax rate for fiscal 1999 is telecommunications, 35% compared to a tax rate of 20% in FY1998. datacommunications, test and For FY2000 our new estimate is $1.25 per instrumentation markets. share on revenues of $417 million compared with our prior estimate of $1.19 on revenues of $395 million. Reports Record Fourth Quarter Earnings of $0.21 per Share and Revenues of $54.1 Million Vitesse Semiconductor reported record fourth quarter (September) net income of $0.21 per share ($16.5 million) on record revenues of $54.1 million vs. net income of $0.13 per share ($10.1 million) and revenues of $30.8 million one year ago. We had estimated earnings of $0.20 per share on revenues of $53 million; the street consensus was $0.20 per share. Revenues for fiscal 1998 were $175.1 million, an increase of 67% over $104.8 million for fiscal 1997. Net income for fiscal 1998 was $0.67 per share ($52.9 million) vs. $0.44 per share ($32.9 million) for fiscal 1997. On a sequential basis, revenues increased 17.4%, the thirteenth consecutive quarter of sequential revenue growth of 10% or more. Exhibit 1. Vitesse Sequential Revenue Growth Model Source: Company Data Product Revenues Revenues for the fiscal year in Telecom was $85 million; Datacom was $45.5 million and Test Equipment was $43.3 million. In the future. the company will discontinue reporting revenues and bookings by Telecom and Datacom and will combine these two segments into Communications. We have been expecting this would happen because of the accelerating convergence of the two segments, and the difficulty the company has in distinguishing between the two. Note that datacom showed the strongest growth in the past year, while ATE showed surprising strength. Revenues by geographical location for fiscal 1998 were as follows: North America 80% Europe 10% Japan 10% Exhibit 2. Vitesse Semiconductor Product Revenue Model Source: Company Data Exhibit 3. Vitesse Product Revenues by Quarter Source: Company Data Exhibit 4. Vitesse Product Bookings by Quarter Source: Company Data Reports book-to-bill of 1.17; 1.22 in communications Total bookings for the quarter were $63.5 million for delivery for the next six months. This would have been a book to bill of 1.2 if the company had come at our revenue estimate of $53 million. Bookings increased 9.5% from the prior quarter bookings and represents the fourteenth consecutive quarter in which the book-to-bill ratio was 1.15:1 or higher. The book-to-bill ratio for telecommunications segment was 1.22, data communications was 1.22 and test equipment was 1.07 for the quarter. Telecom bookings were $31.8 million (50% of total), datacom bookings were $18.3 million (29%) and test equipment bookings were $13.5 million (21%) vs. $26.7 million, $17.4 million and $13.7 million, respectively, for the prior quarter. The backlog at the end of the fourth quarter was at $102.5 million, an increase of 10% over the backlog of $93 million reported at the end of the third quarter. We believe that $30 million of the current backlog is for the Test Equipment segment. Datacom Datacommunications was the fastest growing segment over the past year and include products for fiber channel, gigabit ethernet, and ATM. We believe that fiber channel is now less than half of the revenues in this segment. We also believe that the company is beginning to supply significant quantities of OC-48 products to traditionally datacom customers This is one of the reasons the company is finding it difficult to differentiate between datacom and telecom. The company is also supplying products to contract board