Chip Maker Vitesse May Catch Up With Rivals in Stock Race, Analysts Say
The founders of Vitesse Semiconductor Corp. named the Camarillo company after the French word for speed. But compared with the stock market performance of its rivals, Vitesse has lately looked more like a tortoise.
Although shares of Vitesse have jumped 119% since a year ago, the stock of Applied Micro Circuits Corp. of San Diego has rocketed 511%. And shares of PMC-Sierra Inc. of Burnaby, Canada, have soared 474%.
So why is virtually every telecommunications analyst on Wall Street recommending Vitesse stock? Because the market for communications chips is expanding so rapidly, said Arun Veerappan, an analyst with Robertson Stephens in San Francisco, that “all three of these companies will do very well.”
Vitesse has looked slow, Veerappan and other analysts said, primarily because of its reliance on Lucent Technologies Inc., which accounts for about 20% of its business. For the six months ended March 31, Lucent, the former AT&T; unit that designs and manufactures communications systems, saw revenue rise just 8% to $20.16 billion. That’s a slow pace for a company operating in an industry that literally travels at light speed.
Meanwhile, Applied Micro’s shares have risen based on its links with Nortel, which has grabbed market share from Lucent. PMC-Sierra has the most diversified customer base of the three, according to Veerappan, selling to Lucent, Nortel and Cisco.
However, much of the Lucent business is coming back, said Hans Mosesmann of Prudential Securities, making Vitesse attractive because it has traded at a discount compared with Applied Micro and PMC-Sierra. Vitesse’s stock closed Friday at $75.88, up $1.81 on Nasdaq.
Certainly Vitesse, which has 1,040 employees, has put up some healthy numbers recently. Second-quarter revenue hit $100.2 million, an increase of 50% over the $66.9 million in the same period a year ago. Excluding an acquisition-related accounting charge, income rose 74% to $27 million, or 16 cents per share, compared with $15.5 million, or 9 cents per share, a year earlier.
What’s driving this growth is the explosion in the volume of information transmitted electronically. In an age when nearly every desk in every office is linked to the Internet, and when homeowners have a growing appetite for cable modems, digital subscriber lines and extra phone lines, telecommunications companies must order billions of dollars of equipment to handle the traffic.
Vitesse is one of the few companies that can make the type of large chips that go into that equipment.
Vitesse is a company that’s always had a reputation for smart technology, but has struggled until recent years to find a market for its know-how.
The company was founded in 1984 by several engineers from Rockwell International Corp. who believed they could apply in the commercial world what they had learned making computer chips out of gallium arsenide--then an exotic material--for military and security agencies.
Efforts to crack into desktop computing were a bust. Though gallium arsenide can be faster than conventional silicon, it is more expensive. And its speed is lost in many desktop applications because the rest of the computer can’t get the information in and out of the processor fast enough to capitalize on the advantage.
But even if desktop PCs weren’t a ripe market, the growing need to connect them has been. Gallium arsenide, it turns out, is the perfect material for taking in a stream of high-speed data, sorting it and sending it on its way.
“We have had to go through several evolutions as the market changed,” said Louis R. Tomasetta, a co-founder who was named chief executive in 1987. “By the early 1990s, we were on track to move into the communications market.”
Vitesse focused on what is called the “physical layer” of communications networks. This is the point in the network, typically at the central offices of phone companies and Internet service providers, where a Vitesse chip takes information converted from light into electronic signals and breaks it into manageable bundles or packages for computer chips farther down the line to sort and route. Each of these offices can require thousands of Vitesse chips.
Vitesse has typically beaten competitors to the market with chips as the speed standards for communications increased. The company, for example, was the first to sell a chip that could route data at the 2.5-gigabit-per-second standard. And it was first to develop a 10-gigabit chip, which is about 200,000 times faster than a typical computer modem.
Although gallium arsenide technology has powered Vitesse previously, Tomasetta said, the company faced another critical juncture three years ago when it had to decide whether it would stick to its gallium arsenide roots or become a broader communications chip maker, regardless of the technology.
Vitesse chose the latter path, devising a strategy to work its way deeper into the electronic boxes that make up the heart of high-speed communications links.
Vitesse leveraged its existing sales force and the relationships it had built with Lucent, Fujitsu and other telecommunications technology companies.
As recently as two years ago, all of the company’s revenue came from gallium arsenide chips. But two years from now, half will come from the more conventional silicon as Vitesse expands its offering for the communications market, Tomasetta said.
Two acquisitions--totaling $1.2 billion--are helping Vitesse make the transition.
In late May, Vitesse completed its purchase of the 80-employee SiTera Inc. for $750 million in stock. SiTera, based in Longmont, Colo., develops communications chips and software.
And in March, Vitesse acquired the 35-employee Orologic Inc. of Research Triangle, N.C., which designs ways to manage data traffic on these high-speed communications networks, for $450 million in stock.
The purchases bring more brains to the company and could allow it to capture more of a market that could grow to $6 billion in the next few years, according to Shekhar Wadekar, an analyst with Dain Rauscher Wessels in Boston.
Only three years ago, Vitesse topped $100 million in revenue for the first time. It’s on track to garner $425 million in sales this year.
Analysts expect the stock to hit $115 to $150 within 12 months, fueled by both growth at the company and a recognition that Vitesse could be undervalued compared with PMC-Sierra and Applied Micro Circuits.
Though Vitesse is decreasing its reliance on gallium arsenide technology, the company is still pursuing exotic materials that could build even faster chips in the expectation that the industry standard will jump to 40 gps in the near future.
It has already transferred some chip production from its 6,000-square-foot clean rooms located just a block from Camarillo’s strawberry fields to a larger facility in Colorado Springs. The move frees up space to experiment with indium phosphide, another material with electrical properties that allow it to work at fast speeds.
“Everybody is working on it,” Prudential’s Mosesmann said. “But I would bet on Vitesse being first because they are used to working with exotic materials.”
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Power Up
Shares of Vitesse Semiconductor Corp. have doubled over the last year because of soaring demand for Communications chips.
Weekly closes: Friday, $75.88
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Source: Bloomberg News
