Doug Freedman of American Technology Research reiterates a "Hold" rating on Intersil stock. His view of the Xicor acquisition and the sale of the WiFi business is generally positive, but with sluggish PC, flat screen and DVD-R markets, Freedman says the company have an uphill battle to increase its share.
The text of his remarks (basically, unedited) are as follows:
We view the company's restructuring as a positive development but remain cautious given our concern over the company's revenue growth and ability to maintain global market share. We believe the company will offer details regarding the impact of the operations restructuring during the conference call on Thursday.
We do not believe all $14M in annual cost savings will be redeployed/invested in R&D and SG&A growth. Since our initiation on June 12th, ISIL stock has traded down though it is still at 19 times FY04 EPS Street estimates. We reiterate our Hold rating on shares of ISIL.
Restructuring positive but maintain cautious stance
We view the company's restructuring as a positive development but remain cautious given our concern over the company's revenue growth and ability to maintain global market share. We believe the company will offer details regarding the impact of the operations restructuring during the conference call. We do not believe all $14M in annual cost savings will be redeployed/invested in R&D and SG&A growth. Since our initiation on June 12th ISIL has traded down 19% and now trades at 19 times FY04 EPS estimates. We reiterate our Hold rating on shares of ISIL.
Expect some confusion over September quarter revenue guidance
The company's 3Q04 guidance (Sept. Q) is likely to include two months of sales from Xicor. If we assume Xicor's growth accelerates in 3Q04 to 8% q/q, the last two months of Xicor sales should add about $10M to ISIL results in 3Q04 (which is not in our estimate or any of our peers). The expense impact of the merger and operating expenses are still unclear as we expect further restructuring to complete the consolidation of operations. We are not sure if the growth of Xicor product sales can offset less than expected growth rates in the computer, DVD-R, and flat panel markets.
Serial restructuring clouds 3Q revenue growth seasonality
In the 3Q03 Intersil completed the sale of the WiFi group and discontinued its automotive product line. The company's 2Q03 to 3Q03 growth, including the automotive business, was 4% q/q - without the automotive business the company reported sales of on-going products declined 1.5% q/q in fiscal 3Q03. AmTech and consensus Street estimates are for revenue growth of 8% q/q in 3Q04, based on the high computer and consumer content that normally ramp in the second half of the year. Given the recent data points of slower than expected back to school demand (as seen in the soft spot price of DRAM) and less then expected growth in the DVD-R products, we are concerned that demand may not show up in time to meet September quarter revenue targets.
Computing percentage of sales continue to decline
Intersil's computing revenue as a percentage of sales has declined in the last three quarters from a high of 35% in 2Q03 to 26% in 1Q04. On a dollar basis computing revenue was flat from 2Q03 to 3Q03 at $44M. We believe the company is experiencing increasing competition in the computing power management sector. In the last 12 months the MOSFET manufacturers have introduced power management controllers and are now in a position to kit the MOSFETs with the power controllers. With power levels increasing, MOSFET requirements are increasing, thus swinging the dollar content towards the MOSFET supplier. We believe Intersil faces an up-hill battle to maintain what was once a 50% market share in desktop core power control.
We do not believe the benefits of the recent restructuring and Xicor acquisition will offset the slower than expected end market growth in Intersil's target markets of computing, DVD-R, and flat panel displays. We reiterate our Hold rating on shares of ISIL.