Integrated Device Tech: Turnaround Begun. 3-Neutral Rating Maintained.
lehman.com
Author: James L. Barlage, CFA (212)526-6093/William J. Michalek (212)526-6203
Rating: 3
Company: IDTI
Country: EPS CUS
Industry: SEMICO
Ticker : IDTI Rank(Old): 3-Neutral Rank(New): 3-Neutral
Price : $5 11/16 52wk Range: $15-4.13 Price Target (Old): $7
Today's Date : 04/05/99 Price Target (New): $10
Fiscal Year : MAR
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EPS 1998 1999 2000 2001
QTR. Actual Old New Old New Old New
1st: 0.02A -0.23A -0.23A 0.06E 0.03E - -E - -E
2nd: 0.03A -0.25A -0.25A 0.09E 0.08E - -E - -E
3rd: 0.03A -0.06A -0.06A 0.13E 0.18E - -E - -E
4th: 0.02A -0.01E 0.02E 0.22E 0.26E - -E - -E
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Year: $0.10A $-0.55E $-0.52E $0.50E $0.55E $- -E $1.05E
Street Est.: $-0.61E $-0.54 $0.43E $0.38 $- -E $ - -E
*Excludes unusual items.
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Price (As of 4/1): $5 11/16 Revenue (1999): 539.8 Mil.
Return On Equity (99): N/A Proj. 5yr EPS Grth: 25.0 %
Shares Outstanding: 82.4 Mil. Dividend Yield: N/A
Mkt Capitalization: 468.61 Mil. P/E 1999; 2000 : N/M; 10.3 X
Current Book Value: $3.20 /sh Convertible: YES
Debt-to-Capital: 52.3 % Disclosure(s): G, C
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Highlights:
* Integrated Device Technology may be beginning a sustainable turnaround
after significant restructuring activity.
* While the company's earnings growth could be good going forward,
particularly in the second half of fiscal 2000, the actual level of
predictability is low.
* While the common stock has some speculative appeal at current levels, we
are maintaining our 3-Neutral rating as we monitor the company's progress.
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Summary:
- After some three years of a semiconductor industry recession and one year
of extensive company restructuring, Integrated Device Technology may be at
the beginning of a sustainable business recovery. We believe that a slight
profit could be reported in the recently completed fourth quarter of fiscal
1999 (March) after reporting losses (before one time charges) in the previous
three quarters and lackluster financial results for the previous two years.
These profits could build sequentially during fiscal 2000 (March) and by the
third-fiscal quarter reach a level that could begin to drive the company's
share price higher. Therefore, while perhaps a little early, the most
aggressive investors could begin to purchase the company's common with this
turnaround in mind. However, visibility as to how well it will actually be
executed is low. Therefore, we are maintaining our 3-Neutral rating on its
shares at this time as we benchmark the company's progress.
- We estimate that Integrated Device Technology can report revenues for the
fourth quarter of fiscal 1999 (March) of $139 million and largely untaxed
earnings of about $0.02 per share. These would compare to year-earlier
revenues of $150 million and fully taxed earnings of $0.02 per share and
result in a year-over-year decline in revenues of 7% and no change in
earnings per share. The comparison to the results of the immediately prior
quarter would be more favorable since revenues of $136 million and a loss of
$0.06 per share were reported. This would translate into a 2% sequential
gain in revenues and a profit instead of a loss. This would also mark the
second consecutive quarter of sequential revenue growth and a substantial
improvement from the respective first and second fiscal quarter losses of
$0.23 and $0.25 per share, excluding one time charges. This would bring full
fiscal 1999 financial results to revenues of $540 million and a loss of $0.52
per share (before one-time charges). These would compare to fiscal 1998
revenues of $587 million and earnings of $0.10 per share for an 8% decline in
revenues and a loss contrasted to a profit.
- Looking to fiscal 2000 (March), we are estimating that the company can
report a sequential increase in revenues and earnings in each quarter with
these results totaling $675 million in revenues and $0.55 in earnings per
share for the year with a 10% tax rate. This would translate into a gain in
revenues of 25% and a return to profitability. We note, however, that about
$40 million of these fiscal 2000 revenues will be contributed by the
acquisition of Quality Semiconductor which is expected to be completed in
early May 1999. This leaves an internal growth rate for revenues of about
18%, which is slightly better than the growth rate we expect for the
worldwide semiconductor industry. Our preliminary estimates for fiscal 2001
are revenues of $845 million (a 25% increase) and fully-taxed earnings (30%
tax rate) of $1.05 per share which would be 91% higher than our fiscal 2000
earnings estimate.
- Integrated Device Technology manufactures high-performance proprietary
communications memory; standard SRAM memory; microprocessors, both MIPS-type
RISC and x86 devices and logic integrated circuits. During the most recently
reported third quarter of fiscal 1999 (December 1998), when revenues of $136
million were achieved, communications memory represented 36% of total
revenues; SRAM memory, 23%; microprocessors, 22%; and logic, 19% of revenues.
The end markets served included communications infrastructure (network,
wireless and other) which consumed 68% of revenues; shared network (servers,
printers, etc) 12% of revenues; personal computer, 12% of revenues and other
markets, 8%. The company derived approximately 39% of its revenues from
international markets.
- With the general semiconductor industry now in recovery, demand for
Integrated Device Technology's products is generally improving as well.
Growth in SRAMs has been particularly good during the past few months as
prices have firmed. Demand for logic and RISC microprocessors has also been
growing with communications memory firm but less robust. The product area
that continues to provide significant demand volatility and high risk
opportunity is the company's Intel-compatible WinChip microprocessor business
that sells into the personal computer market. This will contribute an
estimated 5% of total revenues in fiscal 1999 and will probably trend lower
in the fourth fiscal quarter, whereas the company's other products could
trend higher, because of seasonal factors and a product line transition.
- Integrated Device Technology's Intel-compatible microprocessor WinChip
products have, so far, failed to meet earlier growth expectations. The
company has been competing in the low performance portion of the market (sub-$
1000 PC systems) with products priced to average about $32 per unit.
However, the company has lagged in meeting the performance offered by its
competitors which has relegated it to a highly price sensitive segment of the
market. The company is now in the process of introducing a 333-MHz
equivalent product (WinChip 3) and has a redesigned device (WinChip 4)
scheduled for volume production in the first calendar quarter of 2000 that
could achieve an equivalent speed of 400 MHz. If Integrated Device
Technology can execute this plan, it will be better able to supply the
performance needs of the market and accelerating growth could occur. The
market for Intel-compatible microprocessors is extremely large ($22 billion)
and only a very small penetration could have a significant impact on
Integrated Device Technology's financial performance. However, this market
has been extremely competitive and it is by no means assured that the company
will ultimately be successful in supplying it. Although the potential for
WinChip is large, the company is not totally dependent on it to provide
growth. From about a $30 million estimated contribution from WinChip in
fiscal 1999, our estimate for fiscal 2000 has assumed WinChip revenues of $50
million and our fiscal 2001 estimate assumes WinChip revenues of $100
million.
- Integrated Device Technology has agreed to acquire Quality Semiconductor
for about 5.5 million shares of common stock. This transaction should be
completed in early May 1999 and should add about $40 million to the company's
revenues in fiscal 2000. This acquisition will add to Integrated Device
Technology's networking products and will broaden its line of logic devices.
Over the next few quarters, Quality's business structure will be integrated
into Integrated Device Technology. This will increase savings and enable
Integrated Device Technology to absorb some excess capacity.
- One of Integrated Device Technology's most significant problems during the
past few quarters has been excess capacity. This condition arose as the
company brought on a major new facility just as the semiconductor market was
peaking. A restructuring to remedy this condition began in the first quarter
of fiscal 1999 (June) with a non-recurring charge of $35 million largely to
write off unneeded manufacturing equipment. This was followed in the second
fiscal quarter (September) with a charge of $217 million which included a
reduction in employment levels, the closure of the company's San Jose,
California wafer fabrication facility and a write down of manufacturing
equipment in its newest facility in Oregon. The final implementation of
these cost reduction actions were completed in the third fiscal quarter and
marked the beginning of a more normalized cost structure, although some line
item changes will occur with the acquisition of Quality Semiconductor.
- Because of firming industry conditions as well as a shift in market focus
from personal computers to communications, demand is growing again for most
of the company's products. Additional revenues will be added by the
acquisition of Quality. Consequently, we expect sequential quarterly revenue
growth to occur during fiscal 2000 which should increasingly allow the
company to gain margin leverage from the high fixed costs and relative low
utilization rates associated with its semiconductor manufacturing.
Additionally, Integrated Device Technology's restructuring program has
reduced operating costs by $20-$25 million per quarter. Consequently,
operating margins could rise quite rapidly during the course of the year.
Initially, the synergy associated with the acquisition of Quality
Semiconductor will be largely confined to SG&A expenses as Integrated Device
Technology assumes these functions. Later, we expect Quality's manufacturing
functions to be absorbed which could provide further cost benefits.
- Earnings per share could, therefore, achieve a meaningful level by the
third fiscal quarter and grow strongly in the fourth fiscal quarter where an
annualized earnings rate of almost $1.05 could possibly be reported. Again,
visibility is limited and these estimates are highly conjectural. This
earnings level would be maintained in fiscal 2001 under our assumptions
because of a tax rate increase to 30% from 10% in fiscal 2000. Nevertheless,
if earnings of $1.05 per share are actually achieved, it would most likely
support a stock price significantly higher than its current level. If the
company failed to meet our expectation, but still demonstrated meaningful
progress, the common stock probably has little downside from its current
level. Therefore, close attention to the purchase price of an investment in
the company's common could mitigate the business risk involved.
- Integrated Device Technology's current financial structure is adequate.
As of December 27, 1998 the company had about $170 million in cash on the
balance sheet (about $2.05 per share), a current ratio of 2.3 and long-term
debt equal to 52% of its permanent capital structure. Its book value equaled
$3.20 per share.
BUSINESS DESCRIPTION: IDTI manufactures high-performance proprietary
communications memory, SRAM memory, specialty microprocessors and logic IC's,
which are targeted toward applications in communications and computing.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.
This document is for information purposes only. We do not represent that this
information is complete or accurate. All opinions are subject to change. The
securities mentioned may not be eligible for sale in some states or
countries. This document has been prepared by Lehman Brothers Inc., Members
SIPC, on behalf of Lehman Brothers International (Europe), which is regulated
by the SFA. ] |
