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

To: Bulldozer who wrote (2562)	6/1/1999 4:27:00 PM
From: Beltropolis Boy	Read Replies (1) \| Respond to of 4710

>And now for one of my more technical posts ... speaking of technical, these two guys at lehman got fancy with the shift and 8 key. hey, i'm just jealous. i want that job. fwiw, it's a week old and typical disclosures apply (i.e., myers and vassily, at least, are not putting their money where their mouth is). ----- Vitesse Semiconductor: XaQti Acquisition Extends Product Reach Author: Daniel Myers (415)274-5440, Kevin Vassily (415)274-5251 Rating: 1 Ticker : VTSS Rank (Old): 1-Buy Rank (New): 1-Buy Price: $52 5/8 52wk Range: $59-17 Price Target (Old): $68 Price Target (New): $68 Today's Date: 05/25/99 Fiscal Year: SEP Price (As of 5/24): $52 5/8 Revenue (1999): 280.0 Mil. Return On Equity (99): 18.6% Proj. 5yr EPS Grth: 35.0 % Shares Outstanding: 81.9 Mil. Dividend Yield: N/A Mkt Capitalization: 4.30 Bil. P/E 1999; 2000 : 53.7X; 40.5X Current Book Value: $5.01/sh Convertible: None Debt-to-Capital: 0.0% Disclosure(s): C, A Highlights: * Yesterday, Vitesse announced it had entered into an agreement to acquire XaQti Corporation for $65M in common stock. XaQti is a semiconductor company focused on the emerging area of communications processors, specifically in the areas of gigabit Ethernet and Internet Protocol (IP). * The transaction will have no immediate financial impact, and will be accounted for as a pooling of interests. We believe that material revenue from this transaction should appear in the second half of CY 2000. * The acquisition reinforces Vitesse's strategy of extending its product reach down through its vertical markets, and longer term can drive more revenue per communication port shipped. * Vitesse also reinforced guidance for the June quarter, stating that it is comfortable with current estimates. Our estimates for the June quarter are 10% sequential growth and EPS of $0.23. * We reiterate our 1 Buy rating and $68 price target, which assumes a mean historical multiple of our CY 2000 estimate of $1.30. ACQUISITION HIGHLIGHTS On Monday, Vitesse announced that it was acquiring XaQti Corporation for $65M in common stock. XaQti is a privately held semiconductor company based in Santa Clara, CA, and is focused on the emerging class of communications ICs known as network processors. XaQti's products include processors for gigabit Ethernet and Internet Protocol (IP). Vitesse expects no material impact on near term financial results. Material revenue from XaQti products should appear in the second half of CY 2000, and will carry gross margins near the corporate level (low to mid 60% range). STRENGTHENS VERTICAL FOCUS We view this as an important acquisition for two reasons. First, it reinforces Vitesse's strategy of expanding its product offerings further down into its vertical markets. Vitesse has traditionally been associated with physical layer products (PHYS) for vertical markets including SONET, Fibre Channel, gigabit Ethernet and Fibre Channel, but has been expanding its product offering to include the processing layer and switching layer. It has done this both organically, (Cross-Stream products for switching applications), as well as through acquisition (VTEC - SONET processors, Serano Systems - Fibre Channel processors). As a result of these efforts, Vitesse has rapidly built its product portfolio. With XaQti, Vitesse has added two more pieces to the puzzle, giving it an emerging presence in two important markets. The table below outlines where XaQti fits in the product category/vertical market matrix. SONET Gb Eth ATM Fibre Channel IP PHYS * * * Processors ** XaQti * XaQti Switching * * N/A * Legend: * - Strong Presence - Emerging Presence * - Beginning Presence Secondly, as Vitesse pushes it product reach down through its verticals, its revenue per port opportunity increases. In the case of XaQti, a port on a gigabit Ethernet switch can now include both a Vitesse PHY and Vitesse network processor. As well, XaQti gives Vitesse a product in the emerging class of products for IP over SONET. We believe that the processing segment of the communications IC market will be a very lucrative one, and Vitesse is positioning itself well to participate in this market. SECOND QUARTER ON TRACK During the call held to discuss the acquisition, Vitesse reinforced its guidance for the June quarter. Shipments for gigabit Ethernet and Fibre Channel products are strong, and the Lucent outsourcing implementation is proceeding as planned. Our estimates for the June quarter are 10% sequential revenue growth and EPS of $0.23. We continue to believe that Lucent's decision to outsource some equipment assembly to contract manufacturing shops (e.g. Solectron, Flextronics), indicates continued strong demand for SONET products, and could provide modest revenue upside for Vitesse in the second half of CY 1999. VALUATION We believe that Vitesse is positioning itself well to be a long-term leader in the communications IC market. Its rapidly growing vertical end markets, its growing product reach in these verticals, and its blue chip customer base are providing Vitesse with attractive growth opportunities. As such we believe at current levels, Vitesse's stock continues to offer appreciation potential. Our price target of $68 assumes a mean historical multiple of 52.0 times our CY 2000 estimate of $1.30. We reiterate our 1 Buy rating on Vitesse, and continue to view them as one of the premier names in the semiconductor industry. ----- 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.