Genuity comment todayMultiple new product cycles coming online -- We are reiterating our BUY recommendation and C$9.00 target (based on 17x our F2010E EPS of
.52) on Gennum following our marketing event with CFO Greg Miller. Overall, the marketing day reinforced our view that Gennum is undergoing a multiple-year product cycle run as investments in both datacom/telecom and broadcast made through 2007-2009 are starting to pay off. In datacom/telecom, Gennum is breaking into new market segments, while it is regaining broadcast market share. With EPS power of $1 in two to four years, Gennum is a top small cap pick.
Numerous datacom product cycles just starting -- With 45+ new products launched over the past three years, Gennum's datacom outlook appears to be very strong. In fact, the datacom pipeline is two-thirds the size of Gennum's broadcast pipeline (measured by design win dollars) versus nearly zero a year ago -- and the broadcast pipeline has doubled in the same time frame. We expect datacom will become 50%+ of Gennum's sales within a few quarters, up from 45% in Q1/F10 and 25% a year ago. Currently datacom sales are driven primarily by Gennum's XFP SONET portfolio. New product cycles kicking in later this year and in F2011 include 16G fibre channel, Ethernet XFP/SFP+, SFP+ SONET and various line-card/backplane ICs. Gennum reports design wins in all of these areas and with Juniper, Cisco, Huawei and others. Datacom is a secular theme that could see 30-40% CAGR over the next few years.
Broadcast approaching stability; gaining market share -- While the broadcast market is seeing lacklustre end market growth, it is now growing (5-10% per year) versus contracting and Gennum is wining market share. Gennum has seen a modest recovery in North America and Europe, but a much stronger turnaround from Japanese customers (which were hard hit in 2008/9). Gennum believes that its refreshed 3Gbps/HD products are helping win share, particularly from National Semiconductor. Going forward we believe Gennum can generate 10-15% growth after the recent rebound.