Coming Back From When Chips Were Down : Camarillo: Vitesse Semiconductor is engineering a recovery by improving its technology and cutting costs. AT&T; is one of the new customers for the company’s gallium arsenide circuits.

Vitesse Semiconductor Corp. has achieved a turnaround considered unlikely only two years ago, analysts say.

The Camarillo company, which makes gallium-arsenide computer chips, went public in December, 1991, at $9 a share, and though it had few sales, it was touted as a company to watch. The excitement was created because gallium-arsenide circuits, while more expensive than conventional silicon-based semiconductors, enable electrons to travel two to three times faster on chips using less power. The technology was seen as promising for increasingly powerful computers.

By early 1992, Vitesse’s stock had soared to $21 a share.

However, Vitesse’s hopes for profiting in the small market for high-speed chips were short-circuited by its reliance on one customer, Convex Computer Corp. of Richardson, Tex., a supercomputer maker that accounted for about half of Vitesse’s revenue two years ago. When the supercomputer market turned south, Convex’s orders to Vitesse dropped almost to nil. Suddenly Vitesse had excess inventory and too much production capacity. In its fiscal year ended Sept. 30, the company lost $19 million and its revenue plunged 30%, to $26.4 million.

Now analysts say Vitesse has engineered a recovery by improving its technology, cutting costs and boosting its sales to several big customers, including AT&T; and Intel Corp., plus other telecommunications and data communications firms and manufacturers of semiconductor testing equipment.

Analysts expect Vitesse to break even or earn a small profit--its first in two years--in its fiscal third quarter ending June 30. And they predict Vitesse’s stock, now at about $5 a share, has finally hit bottom.

(In the six months ended March 31, Vitesse pared its loss to $4.44 million from an $11.6-million loss a year before, while its revenue shot up 48% to $16.8 million from $11.4 million.)

That’s just in time for the tiny technology company, which has seen its cash level dwindle to $5.2 million as of March 31 from more than $25 million after its stock offering.

At one point it looked as if Vitesse might go out of business, said analyst Mark Edelstone at Prudential Securities in San Francisco.

“They’ve stayed the course, got costs under control and entered new markets,” he said. Vitesse’s liquidity is “not my concern now,” he said.

Vitesse President and Chief Executive Louis Tomasetta said that Vitesse was like “a new start-up company two years ago.” Now, he said, probably 80% of Vitesse’s business is “from customers we weren’t doing business with two years ago.”

Among its new customers are telecommunications companies such as AT&T;, Northern Telecom and Alcatel Canada, which use Vitesse’s gallium-arsenide chips in the fiber-optic and high-speed switching networks they are building.

Telecommunications customers now account for nearly 40% of Vitesse’s revenue, and Tomasetta sees the company’s sales to that industry doubling over the next year as the so-called information superhighway develops.

Just last week, AT&T; was named a prime contractor to build Bell Atlantic Corp.’s planned multibillion-dollar interactive video network.

Data communications--the moving of information among computer networks--is another new market for Vitesse. The company also hopes to sell into the high-end personal computer market.

Vitesse has begun shipping semiconductors called cache memory controllers--which act like traffic cops in moving information back and forth--to giant semiconductor maker Intel Corp., which is producing a new generation of PC microprocessors called Pentium.

Vitesse has also increased sales to semiconductor testing companies including Teradyne Inc., Megatest Corp. and Schlumberger Ltd. Tomasetta said that only gallium-arsenide semiconductors can operate at speeds fast enough to test state-of-the-art silicon chips. That business, accounting for nearly $2 million in sales for Vitesse in the March 31 quarter, could grow by half over the next two years, he said.

To break into these new markets, Vitesse invested in technology to make its circuits even smaller and more powerful. It has also increased productivity, in part by reducing the infiltration of dust particles that can ruin production runs. And Vitesse has trimmed employment through attrition and layoffs, from 300 workers at its peak two years ago to 210 today.

Because it’s more efficient, Tomasetta said, the company has been able to lower prices on some products. Whereas silicon is found in abundance in ordinary sand and silicon chips can be cheaply produced, gallium is relatively rare and combining it with arsenic is an expensive process. Prices for gallium-arsenide semiconductors range from $10 to $1,000 apiece and are generally about three times as expensive as the most common type of silicon chip.

But when measured against the highest-performance silicon chips, Tomasetta said, Vitesse’s semiconductors are still two times faster and are now more comparably priced.

Also, Vitesse recently announced it was lowering its prices by about 40% on one line of gallium-arsenide chips that compete with silicon circuits only a step up in speed from mainstream chips.

Vitesse still faces plenty of competition from other gallium-arsenide vendors such as TriQuint Semiconductor in Beaverton, Ore., and even more so from makers of high-performance silicon chips such as Motorola Inc., Texas Instruments Inc. and Fujitsu Ltd., which have made great strides in improving silicon technology.

“Traditional silicon has carried the load much further and longer than we had estimated,” said analyst Daniel L. Klesken at the Robertson, Stephens & Co. investment firm in San Francisco.

Nonetheless, Klesken said that by the end of the decade, Vitesse could reach $200 million in annual sales if it successfully develops the new markets it has targeted.

Said Tomasetta: “We’re not going to get a chance to rest, at least not for a while.”