Thursday, July 29, 2010

Netlogic Microsystems (NASDAQ:NETL): Weak quarter - Short radar

Netlogic Microsystems (NASDAQ:NETL) may be a short this morning following quarterly #'s and guidance out last night.

Here are some of the comments that have caught my eye:

- UBS is downgrading NETL to Neutral from Buy with a $33.50 price target (prev. $34.50) saying they see limited near-term catalysts that could provide an upside surprise to growth based on expectations for: 1) muted macro improvements, 2) the ramp of NetLogic content-laden LTE wireless infrastructure and IPv6 switch/routers as well as its XLP processor to more likely be 2011/12 events. Thus, as they believe NetLogic’s stock is reflecting a fair valuation, they downgrade to a Neutral rating.

- Cowen maintain Neutral rating on NETL:

Conclusion: NETL reported a solid Q2 with bottom-line upside driven by better-than-expected GMs. Guidance (fully covered by backlog) of +5% seq. is conservative, but many hoped for more. Inventories jumped to 145 days vs. 110 in Q1 on new pdts given tight supplies and NETL not wanting to get caught short. CSCO (27% of revs) was down 4% seq. in Q2 as they burned some inventory on certain legacy platforms. Huawei (~10%) also burning some inventory as they transition to a vendor managed program. Fundamentally, NETL is on track - we continue to expect strong forward growth as NETL continues to capitalize on the multi-core opportunity and increased KBP content in 3G/4G network-related buildouts. NETL has been a strong performer QTD (+21% vs. 8% for the SOX), getting a boost following the announcement of their next-gen XLP processor which significantly increases TAM. That said, we’d expect the stock to give back some esp. given inventory, CSCO, and a conservative guide. NETL trades at 23x CY10 EPS, 21x CY11 EPS. Remains one of the better growth stories around, but there’s little rush in the mkt.

- For objectivity's sake, not everyone is cautious on NETL this morning. Here's a more bullish view from JMP Securities:

We reiterate our Market Outperform rating and $37.50 price target on NetLogic Microsystems while raising estimates following a solid 2Q10 result that produced slightly lower-than-expected revenue of $95M (+10% q/q, +192% y/y, JMP $96M) and that allowed the company to post non- GAAP EPS of $0.38, or $0.05 above our $0.33 estimate (Street’s $0.31). Solid demand across all products and excellent product mix drove non-GAAP gross margins to 69%, or up 280bps over last quarter’s 66.2%, and led the company to raise full-year 2010 guidance from $377M to $383M, illustrating the increasing performance gap that the company’s solutions provide over the competition. For us the highlight of the quarter was the company’s ability to accrete both top line and margin, as well guide up on the outlook, despite Cisco-derived revenues falling sequentially from 37% of sales to 27% of sales on that company’s rebalancing of inventory at contract manufacturers. This speaks to the diversification strength of the NetLogic story, as well as its leverage to the 3G/4G wireless infrastructure story, in our opinion, and we are increasing our CY11 non-GAAP EPS estimate from $1.50 to $1.55. Our unchanged $37.50 price target represents ~24x our new FY11 non-GAAP EPS estimate of $1.55, and we view a 24x multiple as an appropriate premium to our coverage universe mean multiple of ~13x given the companies unique market position, leverage to wireless infrastructure trends, and disproportionately large addressable market.

Notablecalls: OK, this is what NETL's recent quarterly track-record looks like:

July 28 2010
Netlogic Microsystems, Inc. Guides Q3 $0.36 v $0.33e - conf call
- Guides FY10 $1.40 v $1.30e, R$383M v $379Me (previously guided FY10 EPS $1.28

April 29 2010 Netlogic Microsystems, Inc. Reports Q2 $0.38 v $0.32e, R $95M v $95Me
Netlogic Microsystems, Inc. Guides Q2 $0.32 v $0.29e, R$95M v $88Me - conf call
- revenue opportunities in the high end are growing rapidly.
- sees growth from each of its top 5 customers.

February 2 NetLogic beats by $0.17, beats on revs, reports better than expected gross margin
Reports Q4 (Dec) earnings of $0.59 per share, $0.17 better than the First Call consensus of $0.42; revenues rose 124.9% year/year to $69.5 mln vs the $61.9 mln consensus
NetLogic sees Q1 EPS of $0.56 vs $0.40 (43.33 +0.84)

Notice the difference in the magnitude of the beat? We didn't much of a beat & raise this qtr.

In addition to that, as Cowen points out, inventory is up both at Cisco & Huawei (both large customers). While is may be tied to new products it's still worrisome.

Note that NETL sold off 3-4 pts back in April on seemingly better results than what we got yesterday.

The stock is trading 20x EPS, which is tad on the high side.

Anyway, one to watch on the short side. Should be down 10% today.