Wedbush Morgan analyst Craig Berger recently sent a note to clients on Trident Microsystems (TRID) recent quarter. Wedbush continues to maintain a BUY rating for shares of Trident. Excerpts follow:
Some Primary Investor Criticisms Regarding TRID are Overdone
We have repeatedly heard several primary investor criticisms regarding TRID, which we respond to below:
1. Options Backdating – Management did admit that it backdated its stock options, a relative negative, which should result in restated historical financial statements, delayed SEC filings, historical non-cash GAAP charges, and shareholder lawsuits; Nevertheless we do not believe the firm’s options backdating will impact its revenue and earnings prospects in 2H’06 or 2007. We sympathize with investors’ concerns about the options backdating issue. This clearly is an overhang on the stock given the potential legal liability to the firm, and the distraction to management’s attention.
2. Perceived light revenue growth commentary for Dec’06 quarter – Management did comment that it sees at least 5-10% sequential revenue growth in the December 2006 quarter. This is likely less than most investors were thinking for December, but we do not believe that management’s comments were meant as formal guidance, but rather an indication that they will grow sequentially in December. We believe that revenue visibility for December remains very poor at this juncture, and given our expectations for total LCD TV volumes of 47 million units in 2006, we expect that Trident will ultimately grow by better than +15% QoQ for December.
3. Declining Gross Margins – Gross margins are expected to decline 100bps per quarter from Mar’06 through Dec’06, implying a 51% gross margin for the December quarter. We think it is alright if Trident’s gross margins decline a few points in order to keep large volume sockets at top customers like Sony and Samsung, especially when market volumes are growing so substantially. We believe the firm will be able to keep its gross margins above 50% for some time and should be able to hold its operating margins flat on a higher base of revenues, a positive. Also, it is important to remember that the firm is manufacturing its products at 0.18-micron today, and has headroom to move down to 0.13-micron and even 0.09-micron further out in time.
4. June Inventory Spike – Inventory increased from $6.6 million in March to $15 million in June driven by its customers’ requests that it carry more buffer inventory to respond to upside. We believe the firm’s 29 days of inventory on hand in March was indeed too lean and thus it seems reasonable for Sony and Samsung to want to be able to source upside chip requests from Trident should LCD TV demand warrant increasing orders to Trident. We do not think this is a case of weaker than expected demand driving increased inventories.
5. 2007 Market Share Loss – Many investors are concerned about sizable market share losses for TRID in 2007. While the design win process is still ongoing, it seems that TRID should reasonably hold share at Sony, while potentially ceding a bit of ground at Samsung, and gaining some ground at Sharp and Philips. We think these early indications indicate somewhat of a washing out close to the firm’s current 33-35% share of the LCD analog image processor chip market.
Jun’06 Quarterly Results Recap: Another ‘Beat and Raise’ Quarter for Trident
• On July 27 Trident Micro reported limited c’Q2 results (limited by pending options backdating driven restatements) with revenues of +19% QoQ significantly beating guidance of +10-12% QoQ. Trident has once again upsided its own guidance and consensus expectations. Revenues of $53.2 million beat our own forecast of $50.9 million and consensus estimates of $49.8 million. Preliminary gross margins were about 54.0%, roughly +90bps better than our forecast driven by some one-time gains. We believe EPS could come in around $0.21 to $0.22 when ultimately reported by the firm.
• Management guided c’Q3 revenues to grow +20% QoQ to $63.4 million, ahead of consensus estimates of $59.3 million and inline with our Street high estimate. This was indeed another ‘beat and raise’ quarter for Trident, continuing a very impressive consecutive string of such quarters. The firm did not guide c’Q3 expenses or EPS, though we estimate the firm will earn around $0.26. Gross margins are guided to decline to 52%, in-line with management’s previous guidance that gross margins would trend down to 50% as chip volumes ramp up. Some additional operating expense spending will be driven by the options backdating driven restatements.
• Visibility into 2007 shipments is increasing with positive commentary regarding likely market share gains (in a growing market), continued traction with top customers Sony (NYSE:SNE), Samsung and Sharp (OTCPK:SHCAY), and solid prospects for a respectable ramp of integrated analog/digital HiDTV and HiDTV Pro shipments. Trident believes that, based on current TV design win activity, that it can increase its share of the image processor chip market to 40% by the end of c’2007, up from 30-35% share today, a significant positive for investors concerned that the firm’s ‘3S’ customer base may choose to move away en masse to other chip solutions. Trident indicated it is likely to hold market share at Sony and possibly at Samsung, while possibly increasing share at Sharp, which is still mostly captive. Additionally, management mentioned it believes it can ship $40 million of HiDTV (Pro) shipments in 2007, versus our forecast of $21 million, possibly driving $0.12 of EPS upside to get to management’s target.
TRID 1-yr chart: