What does Gennum's murky guidance say about tech revs?

We spend a bunch of time each day thinking about the recession. A new deal opportunity comes in, and you have to imagine what the recession will mean for their forecasts. Will they hit the downside case? What happens to the accounts’ receivable if things get worse — as in will their customers drag out terms even further? The backlog is also important, because the budgets that support the customer backlog forecasts are not always approved or backed by signed P.O.s. And then there’s the question I was asked in Abu Dhabi: “is it a two year recession or a five year recession?” (see prior post “Gulf trip: Day Four” December 4-08). Few early stage business plans are prepared for that scenario.

In the interests of passing along anecdotes that will help you consider the more near term outlook question, here is a good research piece from the team at Genuity Capital Markets on Gennum (GND:TSX). Gennum’s clients are largely industrial, but some of their sales are certainly driven by consumer behaviours:

“Moving to a HOLD – Gennum’s Q4/F08 results were in line with our estimates. However, the company provided an outlook that was much more cautious than we previously anticipated. Visibility is terrible, end market demand is waning and customers are actively managing their inventory levels in the face of a deteriorating economy. As a result, the company expects that
Q1/F09 revenues will fall “significantly,” and that its revenues will follow the overall semiconductor industry in 2009. Currently, the semiconductor industry is expected to see revenues decline by 20% in 2009. With our numbers coming down meaningfully, we are moving our rating to a HOLD from a BUY. Longer-term, we believe the company is moving down the right course, as it is holding operating expenses and focusing on new product cycles
like ActiveConnect, PCI Express, 3Gig and SFP+ modules. Our new target of $7.00 is 7.5x EBITDA + cash. Determining the right multiple in this environment is very difficult given the volatility.

• New numbers: F2009E could be down 25% – With the lower outlook, we are reducing our revenue and EPS forecast for F2009E to $98 million and $0.27, respectively, from $127 million and $0.60, respectively. We are looking for a 23% revenue decline in 2009, versus previous expectations of flat. Helping offset the revenue decline is a 15% cut in operating expenses to the $15 million per quarter range. Gross margins are expected to remain strong at 75%, with operating margins of 12.8%. Overall visibility in 2009 is terrible, with very little certainty at this point.
• Q4/F08 in line with our numbers – Revenue and adjusted EPS of $30.3 million and $0.14, respectively, were in line with our expectations. Consensus estimates were higher at $33 million and $0.17, respectively. Gross margins remained strong at 76.3%. However, operating margins with lower revenues fell to 18.7%, below the company’s goal of 20-25%.

• AMS feels takes a hit – AMS revenues were down by 16% QoQ and 10% YoY to $22.5 million as the company saw its Video customers, especially in Japan, become more cautious. End market demand had softened, but customers were also ratcheting down inventory. The company indicated that SD-SDI revenues were down meaningfully, and that to a lesser degree, HD-SDI were also down. The company indicated that Video revenues in N.A. and Europe were a bit more stable despite weakening. Optical sales in Q4/F08 were strong at $4.8 million, up 37% QoQ. However, the company indicated that they were declining meaningfully with the downturn.

Significant Q1/F09 shortfall driven by end market and inventory management – For Q1/F09, we are looking for revenues to decline by 34%. While that is dramatic, it is not out of line with the company’s semiconductor peers. For example, Texas Instruments is expecting a decline of 40%, Maxim 30-40%, ADI 30%, Nvidia 50%, Intersil 40% and Fairchild 25-30%. The company indicated that it was seeing a massive decline in customer inventories, as they were unsure about the outlook.

• Video relatively good, however Japan is falling off a cliff – In the Video business, the company indicated that weakness was coming from Japan in particular, as the 3Gig rollout in that region has stalled. We suspect that Japanese exports have come to a standstill with the strengthened YEN. Although seeing signs of weakness, North American customers like Evertz (ET-T: C$13.75, HOLD, Target – C$13.50) and Miranda (MT-T: C$7.01, BUY, Target – C$11.25) appear to be showing relative strength. In Optical, the company indicated that weakness was acute, as enterprise spending had slowed considerably. IP revenues continue to be strong, as the company is seeing a number of customers look to outsource development.

• H2/F09 is murky – Beyond Q1/F09, the company has very little visibility. We are modeling revenues to pick up starting in the H2/F09 as customers look to rebuild inventory while the demand situation stabilizes. We are looking for H2/F09 revenues to be 30% stronger than in H1/F09. We do, however, acknowledge a H2/F09 pick up is a risk at this point. That is why the company is actively cutting costs by 15% through holding down discretionary spending and focusing on near-term revenue opportunities. We believe this will help the company maintain
profitability, leading us to model operating margins in F2009E between 12-13%. Additionally, the company is also looking at strategic options for its BST (Barium Strontium Titanate) capacitor chips, which is a drag on earnings.

• Focus on product cycles – While the outlook is uncertain, the company is committed to gaining market share during the downturn and focusing on product cycles like ActiveConnect, PCI Express, optical components for SFP+ and 3Gig. On its conference call, the company said
that it was committed to maintaining R&D investments in these areas.

• Balance sheet is strong – At the end of the quarter, the company had net cash of $49 million or $1.37. We believe the company is looking at potential acquisitions; however, it is being very prudent, as cash is king right now.”

MRM