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

To: drsvelte who wrote (2547)	5/25/1999 12:11:00 PM
From: A. Edwards	Read Replies (1) \| Respond to of 4710

5/25/99 SSB maintained Buy (1H), raised target price VTSS: Vitesse to acquire privately-held XaQti Corp. Salomon Smith Barney Tuesday, May 25, 1999 --OPINION------------------------------------------------------------- Vitesse Semiconductor announced that it will acquire XaQti Corp., a private company, for $65 million in common stock. The transaction will be accounted for as a pooling of interests and is expected to close by the end of July. The transaction is expected to have no material impact on Vitesse's 1999 financial results. While we are not raising our 2000 estimate at this time, we expect that XaQti will be accretive to earnings next year. XaQti, founded in September 1995, currently designs and markets Gigabit Ethernet chips and system design tools to leading (but undisclosed) networking OEMs today. In addition, XaQti's TeraPower chip is used to provide Gigabit Ethernet and packet-over-SONET capability and will be available in production in early 2000. We believe this product line complements Vitesse's existing physical layer products and will allow Vitesse to offer a more complete Layer 3 Switch solution (physical layer, processing and switching). The company indicated that they could make additional acquisitions over time in the processing and switching arenas in order to fully address the IP, SONET, Fiber Channel and Ethernet product segments. XaQti's TeraPower chip is a programmable packet processor that integrates many processing functions (queuing, address resolution, prioritization) into a cost-effective application-specific standard product (ASSP). The TeraPower ASSP will target existing ASIC solutions which are typically larger and less cost efficient than ASSPs. For Gigabit Ethernet applications, equipment OEMs can use XaQti's TeraPower chip and Gigabit Ethernet media access controller (MAC) chip along with Vitesse's SERDES chip and CrossStream processor to build an end-end solution. For packet-over-SONET applications, OEMs can use Vitesse's forthcoming packet-over-SONET framer chip in conjunction with the TeraPower, CrossStream and SERDES chip to provide a complete end-to-end OC-48 (2.5 Gigabits per second) SONET implementation. We believe programmable packet processors should be important sources of revenue for Vitesse in 2000 and beyond. Management stated that it expects the gross margin on the XaQti products to meet or exceed Vitesse's own gross margins in the low 60% range. At Monday's closing price, the company will issue approximately 1.23 million shares to consummate the transaction. While management would not disclose the current revenue run rate for XaQti, we expect that the acquisition will not be dilutive to current estimates. Business Update. We are making no changes to our June EPS estimate of $0.23 on $72.8 million in revenues. Management reported that the June quarter is tracking to plan and reiterated its comfort with Street EPS estimates (also $0.23). Notably, sales of Gigabit Ethernet and Fiber Channel products are particularly strong. With a new factory now in full production, Vitesse has shortened delivery lead times after nearly three years of capacity constraints. As is commonly the case in similar situations, customers have used the improved responsiveness to reduced component stockpiles and limit orders to product needed for immediate consumption. Simultaneously, Vitesse's largest customer (Lucent, at 25% of sales last quarter) has also confused the bookings picture by beginning to outsource more manufacturing. As discussed on the company's quarterly conference call in April, this dynamic has reduced Vitesse's visibility and increased its dependence upon 'turns' orders (i.e., bookings received for shipment within the quarter). In our opinion, the reduction in visibility has kept the stock in a trading range for much of the last six months. While the shorter visibility is likely to be a fact of life for Vitesse indefinitely, it is important to recognize that the company enjoyed a long period of unusual backlog visibility because of its capacity constraints. The company's current turns dependency is actually fairly normal when measured against comparable companies such as AMCC or PMC-Sierra. Indeed, we believe the investor base has been sufficiently sensitized to expect lower book-to-bill ratios in the future, and the initial sense of alarm about this change has begun to wear off. Raise price target to $65 from $60. Judging from a series of conversations with management, we believe the company's sense of confidence about the current tone of business has improved over the last several weeks. Based on the company's progress quarter-to-date, the prospects for the broadband communications markets served by Vitesse, and our positive reaction to the XaQti acquisition, we are raising our twelve-to-eighteen month price target for the company to $65 from $60.