December 27, 2007
Research Associate: Harpreet Sandhu, MBA.
Editor: Payal Jalan, M. Fin.
Sr. Editor: Ian Madsen, CFA: ; 1-800-7667-3771, x9417
www.zackspro.com 111 N. Canal Street, Suite 1101l Chicago, IL 60606
Trident Microsystems Inc. / (TRID-NASDAQ) / $6.40Note: All new or revised material since the last update is highlighted.
Reason for Report: CFO Resigns (brks w cvrg 14/18) Prev. Ed.: November 02, 2007; 1Q08 Earnings Update
Brokers' Recommendations: Neutral: 66.7% (12 firms); Positive: 33.3% (6); Negative: 0% (0) Prev. Ed.: 9; 9; 0
Brokers' Target Price: $11.04 (↓ $1.36 from last edition; 14 firms) Brokers’ Avg. Expected Return: 72.5%
Recent Events
On December 19, 2007, TRID announced the resignation of John S. Edmunds, its Chief Financial Officer.
On November 29, 2007, TRID announced that it has been formally notified by the Nasdaq Listing Qualifications Panel that the company is now in compliance with Nasdaq's requirements for continued listing on The Nasdaq Stock Market.
On October 25, 2007, TRID reported its 1Q08 earnings. Total revenue for 1Q08 was $88.2 million, up 24.2% y/y and 24.9% sequentially, and pro forma EPS was $0.34, up 16.7% y/y and 42.4% sequentially.
Overview
Key investment considerations as identified by analysts are as follows:
Key Positive Arguments / Key Negative Arguments· Growth Opportunities – TRID is well positioned to capitalize on growth opportunities with major OEM wins, new products, a low cost structure, and strength in flat panel LCD TVs.
· Enhanced Liquidity – Increase in cash and cash equivalents and absence of debt have improved its liquidity position
· Leading Supplier – Leading supplier of video processors for the progressive CRT TV market in China.
· LCD TV Opportunity – Increasing popularity of LCD TVs could emerge as a major sales driver. / · Expensive Products – Despite gaining traction in LCD TVs, TRID’s products are still considered expensive relative to other flat panel TVs.
· High Competition – Rapid development of the DTV market is attracting new entrants, which has intensified competition.
· Investments in R&D – With evolving DTV standards, the company must heavily invest in R&D to remain ahead of rivals.
· Restatement of Financials – The ongoing investigation of Trident’s stock options granting practices will serve as an overhang until it is resolved, and the company will restate its financial statements to correct the accounting for its historical stock options grants.
Trident Microsystems Inc. (TRID) offers DPTV products, which include integrated mixed-signal video processors and video decoders that are used in digital display devices, ranging from progressive cathode ray tube (CRT) TV, liquid crystal display (LCD) TV, plasma display panels, projection TVs, AV notebooks, and the emerging high-definition televisions (HDTVs).
The company primarily sells consumer electronics products to OEMs and generates most of the revenue from Asia, particularly China, and sources most of its wafer-fabricating requirements from United Microelectronic Corporation (UMC), a third-party foundry based in Taiwan and also the biggest minority shareholder of TTI. Trident itself owns 0.5% equity of UMC. Further information on the company can be found at: www.tridentmicro.com.
Note: TRID’s fiscal year ends on June 30; fiscal year references differ from the calendar year.
December 27, 2007
Revenue
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Total Revenue ($ M) / 1Q07A / 4Q07A / 1Q08A / 2Q08E / 3Q08E / 2008E / 2009E / 2010EZacks Consensus / $71.0 / $64.0 / $306.0 / $345.0
Total Revenue / $71.0 / $70.6 / $88.2 / $70.7↓ / $63.2↓ / $292.1↓ / $325.5↓ / $380.7↓
Digest High / $71.4 / $70.6 / $88.2 / $72.0 / $67.9 / $305.2 / $370.0 / $390.0
Digest Low / $70.1 / $70.6 / $88.2 / $67.9 / $54.3 / $272.8 / $274.9 / $371.4
Year over Year Growth / 24.2% / 2.8% / 4.2% / 7.8% / 11.4% / 16.9%
Sequential Growth / 16.5% / 24.9% / -19.8% / -10.7%
Company Guidance / $70.0-$72.0
Zacks Digest total revenue in 1Q08 was $88.2 million, up 24.2% y/y and 24.9% sequentially. Revenue of $88.2 million was below with the Street consensus of $90.2 million and at the lower end of the guidance range of $88.0-$92.0 million. One analyst (Needham) believes that inventory rebalancing at a tier-one OEM and a shortage of double scan panels caused the revenue to fall at the low-end of the guidance range.
During the quarter, TRID’s major tier-one customers, Sony, Samsung, Sharp and Philips, continued to contribute the major portion of revenue, accounting for approximately 20%, 38%, 7% and 20%, respectively. While comprising a major portion of the quarter’s revenue, revenue from Samsung decreased as a result of excess inventory absorption from the previous quarter, while revenue from Philips grew substantially.
Outlook
The company guided a revenue range of $70.0-$72.0 million for 2Q08, a decrease of 18%-20% sequentially primarily due to the increasing competition in the low profitable WXGA segment. The company expects revenue growth to resume in the second half of CY2008.
One analyst (Needham) attributed the lackluster guidance to a number of factors, such as, inventory rebalancing at a major customer, likely share loss in the WXGA TV segment, a shortage of double-scan and a slower-than-expected ramp of HiDTV Pro SoC.
Another analyst (Deutsche Bank) expects the company to lose market share at a faster pace than expected, and believes that TRID’s current solutions for the LCD TV market are a lot less competitive than previously anticipated.
For more details on revenue by individual analysts, please refer to the ‘Consensus’ tab of the TRID spreadsheet.
Margins
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 1Q07A / 4Q07A / 1Q08A / 2Q08E / 3Q08E / 2008E / 2009E / 2010EGross / 51.5% / 49.4% / 50.8% / 48.8% / 47.7%↓ / 48.6% / 46.1%↑ / 48.3%↑
Operating / 29.5% / 25.3% / 30.7% / 22.2%↓ / 18.2%↓ / 23.2%↓ / 19.4%↓ / 14.9%↓
Pre Tax / 32.6% / 27.6% / 33.0% / 24.8%↓ / 21.3%↓ / 25.8%↓ / 22.2%↓ / 17.0%↓
Net / 26.0% / 21.9% / 25.1% / 19.3%↓ / 16.4%↓ / 19.9%↓ / 17.3%↓ / 12.7%↓
The Zacks Digest average gross profit in 1Q08 was $44.8 million, a 22.4% increase from $36.6 million in 1Q07 and a 28.5% increase from $34.9 million in 4Q07. Gross margin was 50.8% (above the guidance of 48.5%), an increase of 140 bps q/q and a decrease of 70 bps y/y. One analyst (Roth Capital) attributed the better-than-expected gross profit to the $1.7 million sale of fully-reserved products, favorable product mix, and manufacturing efficiencies.
SG&A expense (8.1% of 1Q08 total revenue) in the quarter was $7.1 million, down 14.6% y/y, but up 17.0% sequentially. R&D expense (11.5% of 1Q08 total revenue) was $10.2 million, up 39.6% y/y, but down 2.5% sequentially.
Operating income in 1Q08 was $27.1 million, an increase of 29.3% from $21.0 million in 1Q07. Operating margin was 30.7%, an increase of 120 bps y/y and 540 bps sequentially. One analyst (Stanford) attributed the sequential increase primarily to the push out of $1.5 million tape out expense to the December quarter.
Outlook
The company guided gross margin decline of 100 bps sequentially to approximately 49% for 2Q08. Further, it expects operating expenses to increase by $1.5 million due to the push out of product tape outs expense from 1Q08.
One analyst (Caris & Co) believes the gross margin in future quarters will be under significant pressure due to new entrants in the market and a worsening mix profile.
Another analyst (Roth Capital) expects the gross margin to fall to 45% by 2H08 due to the continued ASP pressure, and expects TRID to adopt strategies to stabilize the gross margin in the range of 45%-50%.
As per Zacks Digest, COGS is expected to increase by 12.8% y/y in FY08, 18.5% y/y in FY09, and 14.0% y/y in FY10, versus the revenue increase of 7.8% y/y in FY08, 11.4% y/y in FY09, and 16.9% y/y in FY10. SG&A is expected to increase by 8.4% y/y in FY08, 16.2% y/y in FY09, and 36.0% y/y in FY10, and R&D is expected to increase by 24.3% y/y in FY08, 13.2% y/y in FY09, and 27.6% y/y in FY10.
For more details on margins by individual analysts, please refer to the ‘Consensus’ tab of the TRID spreadsheet.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS / 1Q07A / 4Q07A / 1Q08A / 2Q08E / 3Q08E / 2008E / 2009E / 2010EZacks Consensus / $0.15 / $0.11 / $0.63 / $0.70
Digest High / $0.36 / $0.26 / $0.38 / $0.24 / $0.20 / $1.06 / $1.51 / $0.74
Digest Low / $0.17 / $0.10 / $0.16 / $0.16 / $0.11 / $0.57 / $0.42 / $0.74
Digest Avg. / $0.29 / $0.24 / $0.34 / $0.21 / $0.16 / $0.89↓ / $0.89↓ / $0.74↓
Year over Year Growth / 16.7% / -15.6% / -20.0% / -10.7% / 0.0% / -16.5%
Sequential Growth / 20.3% / 42.4% / -37.3% / -25.5%
1Q08 pro forma EPS, as compiled by Zacks Digest, was $0.34, up 16.7% y/y and 42.4% sequentially. As reported by the company, pro forma EPS (excluding amortization of stock based expense and intangibles as well as legal and accounting expense related to stock options investigation) was $0.38, which was above the Street consensus of $0.32. The increase was mainly driven due to higher gross margin and lower opex.
GAAP EPS in the quarter was $0.16, down 13.8% y/y, but up 57.2% sequentially. The GAAP EPS in the quarter included $0.16 for the amortization of stock-based compensation expense, $0.03 for the amortization of intangibles, and $0.03 for legal and accounting expenses related to the company's stock options investigation.
Outlook
The company has not provided any detailed GAAP or non-GAAP EPS guidance for 2Q08.
The Digest average model forecasts EPS of $0.89 for FY08, $0.89 for FY09, and $0.74 for FY10, representing a y/y decrease of 10.7% in FY08 and 16.5% in FY10, but 0.0% in FY09. The estimated 3-year compounded annual growth rate (CAGR) based on 2006 EPS is 11.9%.
Highlights from the EPS chart are as follows:
· 2008 forecasts (18 analysts) range from $0.57 (Deutsche Bank) to $1.06 (Lehman); the average is $0.89.
· 2009 forecasts (15 analysts) range from $0.42 (Goldman) to $1.51 (Zacks Investment Research); the average is $0.89.
· Only one analyst (Goldman) has given 2010 forecast of $0.74.
The majority of analysts decreased their EPS estimates for FY07 and FY08, attributable to market share loss at low end (WXGA) and anticipation of more share loss in future.
One analyst (Oppenheimer) expects EPS to decline y/y instead of the 30%-90% growth in past years due to the expected slowdown in topline and declining gross margins.
In the recent update, two analysts (Collins Stewart and Roth Capital) have decreased the FY08 and FY09 EPS estimates due to the lack of low end product and weak macro environment, while one analyst (Longbow) has increased the FY08 and FY09 EPS estimates due to strong revenues.
For more details on EPS by individual analysts, please refer to the ‘EPS’ tab of the TRID spreadsheet.
Target Price/Valuation
Of the 18 brokerage firms covering the stock, 6 provided positive and 12 gave neutral ratings. None of the analyst provided a negative rating on the stock. Target prices for TRID range from $7.50 (17.2% upside from the current price) (Roth Capital) to $15.00 (134.4% upside from the current price) (CIBC, Lehman), with an average of $11.04 (↓ from the previous Digest report, 72.5% upside from the current market price). All brokerage firms providing the target price based the calculations on a P/E methodology. Following the 1Q08 earnings release, all the analysts reduced the target price mainly to reflect the company’s loss of market share and a much weaker-than-expected guidance. In the recent update, two analysts (Collins Stewart and Roth Capital) have downgraded the stock and four analysts decreased the target price based on weak outlook for CY08 and the departure of the CFO.
Provided below is the summary of valuation and target price as per the Zacks Digest report.
Rating DistributionPositive / 33.3%
Neutral / 66.7%
Negative / 0.0%
Digest High / $15.00
Digest Low / $7.50
Avg. Target Price / $11.04↓
No. of analysts with target price/Total / 14/18
Risks to the target price include continued market share loss, decreasing demand, the company’s new high-risk strategy of expanding into cost-sensitive segments, greater-than-expected chip price declines, inventory build at customers, end market and regional concentration, increasing competition from companies with larger financial and R&D resources, and pricing pressure from customers or competitors.
Metrics detailing current management effectiveness are as follows:
Metric (TTM) / Company / Industry / S&P 500Return on Assets (ROA) / 10.3% / 12.5% / 8.9%
Return on Equity (ROE) / 15.2% / 17.0% / 21.8%
Return on Investment (ROI) / 14.3% / 15.0% / 12.9%
Return on assets of 10.3% and return on investment of 14.3% are higher than the averages of 8.9% and 12.9%, respectively, as measured by the S&P500, but return on equity of 15.2% is lower than the average of 21.8%, as measured by the S&P500.
For more details on valuation by individual analysts, please refer to the ‘Valuation’ tab of the TRID spreadsheet.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
Trident’s cash and cash equivalents in 1Q08 increased to $203.7 million from $199.3 million in 4Q07. Accounts receivables increased to $29.1 million from $9.2 million in 4Q07. Inventory in 1Q08 was $19.2 million, up from $16.3 million in 4Q07, while inventory days were flattish at 40 days. DSOs increased to 30 days from 12 days in 4Q07. The company incurred no long-term debt during the quarter.