Belle cose su Vitesse - gz
By: GZ on Martedì 29 Ottobre 2002 01:11
Sono molto contento di leggere stasera tutte queste belle cose su Vitesse Semiconductors
Sticking With a Volatile Vitesse
By Jonathan Moreland
Special to RealMoney.com
....finally got the pop I'd been waiting for out of Vitesse Semiconductor (VTSS:Nasdaq), as it jumped more than 37% last week. After seeing the company's latest quarter and listening to the conference call after last Monday's close, I had expected a move Tuesday, but the initial jump didn't stick until Thursday and Friday.
The volume of trading on all four days was well above average, and that bodes well that this rebound is the real thing. Not only were any remaining disgruntled investors given ample liquidity to bail, but the new investors signaled clearly that they think the company will make it through these hard times. Friday's volume of 26 million shares traded was more than three times the latest three-month average.
Vitesse is bound to be volatile in coming sessions, but I'm sticking with it. Although this is obviously not as much of a buy as it was 68% ago, new investors with a tolerance for risk can still justify taking a position.
Revenue came in at the low end of expectations, but there were encouraging trends in the sales of new products and cash flow. Fourth-quarter revenue of $38.1 million was down sequentially, but it represented the first year-over-year increase in six quarters. While only flattish first-quarter revenue is expected, the composition of revenue was encouraging. The company's legacy business of producing integrated circuits for so-called transport applications was responsible for only 18% of the total, down from 70% two years ago.
Perceived reliance on what everyone knows is a dying legacy business is why Vitesse became a penny stock this year. The stock had been nearing the $100 level just two years ago. But Vitesse's management hardly had its head in the sand, and has been busily diversifying its products and customers.
Revenue from new product lines has increased 10% sequentially in recent quarters. The best-performing new product line focuses on data storage, which generated $17.3 million in revenue last quarter, up from $15 million in the third quarter. EMC (EMC:NYSE - news - commentary - research - analysis), which is responsible for nearly 10% of total sales, just became one of Vitesse's largest customers last quarter.
On the surface, this wouldn't seem to warrant confidence. EMC, after all, is hardly going gangbusters. But Vitesse's product is imbedded in a next-generation product that is just beginning its business cycle. Its 2-gigabyte product appears to have legs, and in fact is part of the 2-gigabyte lines of most of the players in the storage industry.
The other two major product lines include the Metro products, directed toward regional Bell operating companies, and Enterprise products relating to good ol' fashioned local access networks. Combined revenue for these lines was around $14 million last quarter. That's up from nothing two years ago.
The good news is that revenue trends in the all-important storage products look set to continue for the foreseeable future. The bad news -- and possibly the biggest risk in Vitesse -- is that the foreseeable future is only two quarters out at best. Management freely acknowledges this as well.
Fortunately, management has better control over expenses, which are expected to keep declining in coming quarters. The first quarter of the new fiscal year should be the first to see the benefits of cuts already made. Engineering and development should decline $6 million to $24.5 million and continue to wind down by $1.5 million to $2 million in the following few quarters. Selling, general and administrative costs are expected to come in at $14.5 million, which is nearly $1 million below the last quarter.
Specific first-quarter guidance is $38 million to $40 million in revenue, a 50% to 51% gross margin, an operating loss of $18 million to $19 million, concluding in a per-share loss of 6 cents. Management further estimates cash break-even at $53 million in revenue. A top line of $58 million would make the firm profitable again.
But these targets will come down throughout the year as expenses decline, and management expressed as much confidence as it could muster in the company's ability to return to profitability this fiscal year. By the end of next year, when the company's fabrication facility is expected to be sold, management would hope the firm is running at $60 million in revenue per quarter, with a 60% gross profit margin.
So with revenue and profit margin trends moving believably in the right direction, the other major concern the company had to address was its cash burn. In an excellent move, Vitesse repurchased some of its outstanding convertible debt, as it was trading for around 70 cents on the dollar. By doing this, the company was actually able to bring its net cash position (i.e., its cash minus face value of outstanding debt) up to $48 million at the end of the fourth quarter. Subsequent to last quarter's end, the company has repurchased yet more debt and improved net cash by another $17 million.
With the company's cash burn expected to be "just" $15 million this quarter, Vitesse actually will improve its cash position by a few million dollars. If prices come down on Vitesse's debt again, management would consider repurchasing more. But it's not as if there's a liquid market for these securities. Management more or less has to wait until a debtholder approaches it with debt he's willing to sell at a price that makes sense for management to move.
So it seems that this beleaguered stock has seen its worst days. It took a long time to make money with Vitesse, and investors can't be cavalier about the remaining risk in the stock. In the end, I wouldn't be surprised to see Vitesse back above $2 -- or even $4 -- within a year from now. Of course, that is only if the firm can meet the modest goals it has set for itself. Vitesse still looks like a high-risk, high-reward position.