Zacks Equity Research Analyst Blog

Zacks Equity Research Analyst Blog

Exar Better Over Long Term

Posted Fri Jul 18, 12:39 pm ET
Posted By: Ken Nagy, CFA

Exar Corp. (EXAR) has just completed a merger with Sipex, which will significantly reduce margins. Strong design-win activity and a solid pipeline indicate significant sales growth towards the end of the fiscal year and in fiscal 2009.

However, execution remains an issue, since there are significant hurdles between securing a design win and generating revenue from it. The company has $6.45 of net cash per share, which limits downside risk. We continue to rate shares of Exar a Hold and reiterate our target price of $9.00.

EXAR’s revenue continues to grow, with Alcatel (ALU) making a 14.2% contribution in the last quarter. Networking and transmission products grew very strongly, increasing nearly 24% sequentially. SONET was the major driver within this segment, while T/E carrier devices were a mixed bag.

Design win activity was strong in the last quarter. There were 19 new products in the September quarter. The company has no long-term debt and net cash-per-share of $9.60. This provides management with operating flexibility and the option to consider share repurchases.

The communications business continues to be highly competitive, although the pricing environment has stabilized. End-user demand for telecommunications and networking equipment is still soft. The company launched several clocking products in the June quarter; however, sales continue to languish in the $20K-30K-a-quarter range. Although the recent ON business acquisition brings a potentially new growth product, this will have production ramp-up costs, which will be a drag on near-term margins.

The near-term visibility does not show promise, but longer-term growth prospects are looming. We view the softness at serial communications as temporary. Telecommunications service providers have raised capital spending budgets by roughly 5-10% for 2008, which should trickle down to the semiconductor component and device providers such as EXAR.



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