Applied Micro Circuits

AMCC : NASDAQ : US$6.88 BUY 
Target: US$11.00

Technology — Hardware — Semiconductors and Related Technologies
SOFT NEAR-TERM SERVICE PROVIDER SPENDING IMPACTS CONNECTIVITY SALES; X-GENE AND
HELIX GROWTH OPPORTUNITIES UNAFFECTED
Investment recommendation:

We maintain our belief APM is well
positioned for long-term growth and significant operating leverage as the
first vendor with 64-bit ARM chips designed specifically for the $13B+
server market. While our legacy business estimates were Street-low into
results, lower Connectivity sales in the face of softer service provider capital
spending levels were even below our estimates. We remain cautious on
near-term legacy business trends, but continue to believe in the long-term
ARM server opportunity and HeliX design wins provide a path for embedded
sales recovery in C2016. We reiterate our BUY rating, PT to $11 from $12.
Investment hInvestment highlights
Results/guidance recap: APM report Q2/F2015 revenue of $41.0M and
non-GAAP LPS of $(0.06) or below our estimates of $42.1M/$(0.04) due
to disappointing Connectivity sales of $24.9M, down 20% Q/Q. While we
had anticipated softer Connectivity sales for the next few quarters with
softer service provider spending (particularly in North America), SeptQ
sales and DecQ guidance were below our expectations. With 4-5 month
lead times typical in these markets, we believe a book-to-bill of 1.2x in
the quarter indicates DecQ Connectivity sales have bottomed
X-Gene ARM server opportunity unaffected

 HeliX embedded design wins provide path for C2016 base business
recovery:
:APM recently announced a family of HeliX embedded ARMv8
chips targeted at Networking, Storage, Industrial, and Imaging markets.
We believe tier-1 design wins have already been secured, and we
anticipate first material sales in Q1/C’16 should begin to regrow APM’s
embedded processor business back toward $25M/quarter run rates

Valuation:

Our $11 price target (was $12) is based on shares trading at
roughly 14x our F2017 non-GAAP EPS estimate of $0.80.

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