The Cutting Edge: Computing / Technology / Innovation : When Chips Are Down . . . : . . . It May Be Time to Ante Up a New Strategy
Gallium-arsenide microchips make computers run faster than the ubiquitous silicon chip used today. Gallium chips also need less power. On the wings of such promises rode the hopes of young Vitesse Semiconductor Corp.
Within a few months of its $9-a-share initial public offering in December, 1991, Vitesse’s stock had reached $21, giving the Camarillo-based company a market value of nearly $300 million. This for a tiny firm with a string of losses and most of its revenue from development fees.
Much of the hope for Vitesse was pinned on its deal to supply super-fast semiconductors to supercomputer maker Convex Computer Corp. in Richardson, Tex. Some analysts predicted that by mid-decade, Vitesse could get a sizable chunk of a projected $1-billion-a-year market for gallium-arsenide chips.
Unfortunately for Vitesse and its shareholders, things didn’t work out that way.
Two years ago, with the recession in full swing, the supercomputer market headed south. Convex’s orders to Vitesse plummeted, leaving the company with excess inventory and too much production capacity. In its fiscal year ended Sept. 30, the company lost $19 million and revenue plunged 30%.
Vitesse is a study in what can happen when a company in a fast-moving high-technology industry relies too heavily on a single customer. It is also a textbook case of the pitfalls of inflated expectations.
Yet Vitesse is also an example of how a company can overcome such troubles and turn itself around. Despite the odds, the company has engineered a recovery by improving its technology, cutting costs and finding new customers, including AT&T; and Intel Corp.
Louis Tomasetta, the company’s president and chief executive, said an estimated 80% of Vitesse’s business is “from customers we weren’t doing business with two years ago.”
The company has pared its losses, boosted revenue and is expected by analysts to break even or earn a small profit--its first in two years--in the quarter ending June 30. They predict Vitesse’s stock, now at a lowly $5 per share, has finally hit bottom.
That’s just in time for the small 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 Mark Edelstone, analyst 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.”
Vitesse still faces plenty of competition from other gallium-arsenide vendors, such as TriQuint Semiconductor in Beaverton, Ore. An even bigger threat comes from makers of high-performance silicon chips, such as Motorola Inc., Texas Instruments Inc. and Fujitsu Ltd., whose great strides in improving silicon technology have been a big reason the market for gallium-arsenide chips hasn’t come anywhere near the $1 billion it was once expected to reach by now.
“Traditional silicon has carried the load much further and longer than we had estimated,” said analyst Daniel L. Klesken at Robertson, Stephens & Co., an investment firm in San Francisco.
But gallium-arsenide sales industrywide could soon hit several hundred million dollars, Klesken said, and Vitesse could grow to $200 million in annual sales by the end of the decade if it develops the new markets it has targeted.
Among Vitesse’s 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 telecommunications revolution continues apace.
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, 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 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, which can ruin production runs. The company has a team of six engineers who do nothing but eliminate particles from equipment and find other ways to improve production yields, Tomasetta said.
Vitesse has also trimmed employment through attrition and layoffs, from 300 workers at its peak two years ago to 210 today.
Because it is now 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 that of 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 more comparably priced.
