Semiconductor Firm Still Bets on Its Chips : Electronics: Vitesse Semiconductor has had a tough time creating a market for its gallium arsenide chips. Now it’s planning to go public.

For several years, Vitesse Semiconductor Corp. in Camarillo has struggled to fulfill its vision to create a worldwide market for its gallium arsenide chips, which make computers work faster and use less power than silicon chips.

But it’s been slow going for Vitesse, which is one of a few small companies that make the chips and that have been pouring millions of dollars into research and development. Now, faced with the need to raise cash to keep going, Vitesse is planning to go public in a $27-million stock offering.

Industry watchers were once predicting big things for gallium arsenide, with some even predicting that it would replace silicon, because it can transmit electrons five to six times faster than silicon. The market for gallium arsenide chips today remains small, however, largely because gallium arsenide chips cost much more than silicon ones.

Whereas silicon is found in abundance in ordinary sand, and semiconductors can be cheaply produced, gallium is relatively rare, and combining it with arsenic is an expensive process. Further, the slump in the computer industry has led manufacturers to scale back plans to develop new computers.

In 1990, there were $100 million to $260 million in sales of gallium arsenide chips worldwide, according to various analysts’ estimates--just a speck compared to the $63 billion in semiconductor sales. In addition, sales so far have been limited to aerospace and telecommunications, and there for highly specialized uses.

Nonetheless, Vitesse’s persistence might still pay off. The company has managed to bring its chip production costs down sharply, and a new line of supercomputers using Vitesse technology was recently introduced. 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.

Although Vitesse chips--at $50 to $800 each, depending on size--still cost three times what silicon chips do, those prices are a big improvement over what they were a few years ago, when they were up to 20 times as expensive, analysts say.

Vitesse has also much improved the chips’ efficiency, so much so that they now use less than one-third the power of comparable silicon chips. That efficiency will mean lower operating costs for users.

Still, Vitesse is struggling with losses and a heavy debt load. Over its past four fiscal years, it has suffered a combined loss of nearly $32 million, including a $2.9-million loss on $23.7 million in revenue for the fiscal year ended Sept. 30. Further, most of its revenue so far has been 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, introduced the world’s first line of gallium arsenide-based computers using Vitesse technology. Already, Convex, based in Richardson, Tex., has taken orders for the new computers from European weather services, universities, oil companies and the U.S. Air Force. Harold Dozier, Convex vice president of advanced development, also sees markets in auto makers, chemical and industrial concerns and other organizations that require large amounts of data to be processed quickly.

The Convex computers are priced between $2 million and $10 million, and they 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 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 Louis Tomasetta, president and chief executive and another former 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 debts and fund research and development.

For investors, however, there are still risks aplenty.

In documents filed with the Securities and Exchange Commission, Vitesse warns prospective investors that 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 its fiscal 1992 year ends next September, it warns, it will probably need to borrow more money or to raise funds through another stock offering.

And 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.”