Thursday, November 09, 2006

Calls of Note Part 1

- UBS notes CSCO reported F1Q sales of $8.2B (+2.5% q/q, +24.9% y/y) that handily exceeded the their estimate of $7.88B. Guidance for 24-25% y/y growth in F2Q07, and upbeat comments on Q3 and Q4 prospects set the stage for a material rebound in sales for CSCO suppliers such as NETL, PMCS, BRCM and MRVL.

It now appears evident that recent deceleration at CSCO suppliers reflects lean manufacturing inventory work down rather than portending end mkt slowing. Given lean channel and CSCO inventory at present, and upward bias to sales momentum, the firm believes component sales into CSCO will need to see a strong upward bias in 1/2Q07.

The firm views CSCO switching strength (+15% y/y) as positive for NETL, BRCM and MRVL, CSCO DWDM and routing strength (+ mid-20s y/y, +13% y/y) as positive for PMCS, and advanced technology growth (+23%) as positive for BRCM. NETL is historically some 60-70% exposed to CSCO, PMCS 15-20%, BRCM 10-15% and MRVL 5-10%.

Netlogic Micro (NASDAQ:NETL) stands potentially the strongest potential for a solid mid-2007 recovery out of the CSCO channel and exposure to CSCO's enterprise switching that grew some 15% y/y. Checks consistently indicated there has been no material threat to its leadership position in Gen 3 knowledge-based processors, and that its downdraft into CSCO was exacerbated by concerns CSCO had mid 2006 regarding the scarcity of high-performance substrates NETL uses in the manufacture of its complex devices. They note rival IDTI has experienced a similar slowdown in its network search engines and would be consistent with firm's sense of no material share shifts exiting 2006.

Although adverse data points out of NSM and CSR suggest that wireless trends may continue to warrant some caution from BRCM mgmt, in firm's opinion the strength out of CSCO holds greater weight and puts BRCM in a better position to be upbeat on the outlook at its analyst day.

Notablecalls: Think NETL will see some buy interest. But do keep CSCO on the radar as I feel we may see a sell-the-news reaction there. That may keep NETL from moving up as well.

1 comment:

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