Vitesse Semiconductor Hopes Stock Offering Will Raise $27 Million : Electronics: The firm needs to raise cash to fund further development of its gallium arsenide chips, which are faster than conventional silicon chips.

For several years, Vitesse Semiconductor Corp. in Camarillo has struggled to fulfill its vision of creating a big worldwide market for its gallium arsenide chips, which make computers and communications equipment run faster and with less power than the ubiquitous silicon chip.

It’s been slow going for Vitesse, which is one of a handful of small companies making gallium arsenide chips that have poured millions of dollars into research and development. Now, faced with the need to raise cash to keep the ball rolling, Vitesse is planning to go public in a $27-million stock offering.

Many industry watchers once predicted big things for gallium arsenide because it transmits electrons five to six times faster than silicon, and some even saw the technology as a probable replacement for silicon. But the market for gallium arsenide chips today remains small, largely because its cost is much higher than that of silicon chips.

Silicon is found in abundance in ordinary sand and semiconductors can be cheaply produced with the element. But gallium is relatively rare and combining it with arsenic is an expensive process, and the computer industry slump has led manufacturers to scale back plans to develop new computers--especially ones using unfamiliar technology.

In 1990, the worldwide gallium arsenide chip market had only $100 million to $260 million in sales, according to various analysts’ estimates--just a speck compared to the $63 billion in global semiconductor sales. The use of gallium arsenide chips has so far been limited to highly specialized applications in aerospace and telecommunications.

Nonetheless, Vitesse’s persistence might still pay off, and there are some encouraging signs. Vitesse has managed to bring its chip production costs down sharply, and a new line of supercomputers using Vitesse’s technology was recently introduced--possibly marking gallium arsenide’s first major breakthrough in the commercial marketplace.

As a result, some industry watchers now believe that gallium arsenide’s day might finally be at hand. “It’s headed for a billion-dollar market by the mid-’90s,” predicted Michael Murphy, editor of California Technology Stock Letter.

While prices of Vitesse’s chips--which range from $50 to $800 each depending on size--are still as much as three times those of silicon chips, that’s a big improvement over a few years ago when gallium arsenide chips were up to 20 times as expensive, analysts say.

Vitesse has also vastly improved the efficiency of its chips, to the point where they now use less than one-third the power that comparable silicon chips consume. That means lower operating costs for users.

Such good news comes none too soon for Vitesse, which has racked up a string of losses and a heavy debt load. Over its past four fiscal years, Vitesse has had combined losses of nearly $32 million, including a $2.9-million loss on $23.7 million in revenue in the fiscal year ended Sept. 30 with most of its revenues to date coming from development fees rather than product sales. Its total debts stood at $32.6 million and its net worth--total assets minus total liabilities--was a mere $4.1 million.

A big breakthrough for Vitesse came earlier this year when Convex Computer Corp., a young but ambitious manufacturer of supercomputers with about $200 million in annual revenues, introduced the world’s first line of gallium arsenide-based computers using Vitesse’s technology.

Already, Convex, based in Richardson, Tex., has taken orders for the new computers from such customers as European weather services, universities, oil companies and the U.S. Air Force. Harold Dozier, Convex’s vice president of advanced development, also sees possible applications for auto makers, chemical and industrial concerns and other organizations that require large amounts of data to be input and output quickly.

The Convex computers are priced between $2 million and $10 million and are being marketed to a much broader range of potential customers than the very powerful and even more expensive machines made by other big supercomputer manufacturers.

“There was a lot of feeling in the electronics industry that gallium arsenide technology held a lot of promise, but also a lot of concern as to whether the technology was mature enough to use in a commercial application,” Dozier said. Now, he said, “there would perhaps be more people willing to take a closer look at whether they should use gallium arsenide.”

With its new supercomputers, Convex beat to the punch rival Cray Computer, a Colorado Springs, Colo., company started by Seymour Cray, the founder of supercomputer giant Cray Research. Cray Computer is developing its own line of supercomputers using gallium arsenide technology that it acquired from GigaBit Logic, formerly of Newbury Park. GigaBit merged earlier this year with TriQuint Semiconductor of Beaverton, Ore., Vitesse’s chief competitor with about $30 million in annual sales.

In addition to the Convex computers, Vitesse’s gallium arsenide chips have also gained an added measure of legitimacy through an agreement Vitesse entered in 1989 to license technology to the giant Japanese supercomputer maker Fujitsu, which in turn plans to supply gallium arsenide chips to other computer manufacturers. Such “second sourcing” agreements are common among high-tech companies because systems manufacturers often won’t commit to a technology unless they know that a steady supply of products is assured.

Vitesse was started in 1984 by Alfred S. Joseph, a former Rockwell International executive. In addition to gallium arsenide chips, the company--then called Vitesse Electronics--also tried to develop a “mini-supercomputer.”

In 1987, Vitesse’s gallium arsenide business was acquired by a group of investors led by the Menlo Park-based venture capital firm Sequoia Capital, and the company was renamed Vitesse Semiconductor. Joseph left, and the company is now headed by president and chief executive Louis Tomasetta, another onetime Rockwell executive who was part of the 1987 buyout group.

With the $24.5 million it hopes to net from the stock sale, Vitesse plans to pay debt and fund future research and development.

For investors, however, there are still risks aplenty.

In documents filed with the Securities and Exchange Commission in connection with the stock offering, Vitesse warns prospective investors that even more progress is needed in its manufacturing techniques, and it cautions that systems manufacturers might still be reluctant to use gallium arsenide technology. It notes that Convex alone accounted for 21% of its total revenues in fiscal 1991.

Vitesse also says that it’s going to continue to require lots of cash. After the current fiscal year ends next September, it warns, it will probably need to borrow more money or raise funds through another stock offering.

Also, some analysts remain skeptical that gallium arsenide will ever become a dominant technology.

Applications for super-fast computers using gallium arsenide “are always going to be limited,” said Jerry Worchel, senior analyst at In-Stat, a market research firm in Scottsdale, Ariz. “It’s not something you’ll find on every desktop.”

But, he added, “the potential is definitely there for more rapid growth.”

Vitesse Semiconductor At a Glance Vitesse Semiconductor Corp. in Camarillo is the leading manufacturer of gallium arsenide computer chips, which allow computers to work faster than the more prevalent silicon-based chips. Some industry watchers expect that as production costs come down the market could reach $1 billion in sales by the mid-1990s.