by Kris_Tuttle on October 20, 2009
Vitesse is a little communication semiconductor company that has attracted some interest based on their product set and broad customer portfolio. The real reason for the attention however was an overhang of convertible securities that might allow the stock to move up sharply if they were cleared away.
After what must have been tedious discussions with all the bondholders the company announced a settlement and exchange offer yesterday. We had been waiting for the smoke to clear so we could reevaluate the equity in the event there might be an opportunity to exploit a short-term move in the shares.
The filing goes through the detail in gory detail so we will just summarize the outcome of the terms on the equity holders as follows:
- From a balance sheet standpoint the company should end up with about basically zero net cash or debt. (They ended the most recent quarter with $57M in cash and will use 10M in the transaction and issue $50M in new notes. They will draw on a credit facility for any shortfall and for working capital. So there will be a few million but to keep things simple we will call it a zero.)
- The share count balloons thanks to a newly issued 173M (there are 231M shares currently outstanding) which takes the new total up to 404M. However to avoid going above the 9.9% ownership threshold they company will also be issuing a special preferred that is convertible into common. Taking those additional 77.1M into account the count reaches 481M. (Those preferred shares are convertible at 22.5c per share.)
Using TTM revenues of 168M and a 1-2x TEV/Revenue range it’s easy to compute a very rough valuation interval of $0.34 to $0.69 per share using the full 481M shares. With the shares at $0.36 the stock certainly has some room if the company can begin to show some revenue growth.
Shareholder approval is still needed to complete the transaction so the company is not completely out of the woods as of yet. There don’t seem to be any analysts following the company anymore so there may be no expectations out there for how the company might do going forward. Some of their fiber to the home initiatives seem to be on target. There are some long-suffering equity holders out there that may be relieved to see that the company has achieved this agreement and will avoid effectively going out of business.
The price of freedom is high in the immediate term with more than a doubling of the diluted share count. On October 1st senior management salaries went up to pre-crisis levels after a drop of 10-20% for the fiscal year. So most everyone is happy and relieved although the public equity holder gets the least reward here in the short term.
Looking out further if VTSS can execute and show that revenues have at least stopped declining investors may anticipate a return to a $200M annual revenue run rate which has been “normal” for Vitesse for the past six years. Affording them a 1.5x TEV/Sales puts the shares at the $.60 level. The company still has the approvals to navigate and the need to show at least a quarter or two of growth to justify this level however.
In conclusion there is no major short-term opportunity here based on the terms of the settlement. We wouldn’t rule out some kind of “relief rally” now that they are on a path that should avoid going out of business.
[Disclosure: The author has a very small position in some shares of VTSS to serve as a reminder to monitor the story.]
by Kris_Tuttle on November 27, 2007
It’s no secret that memory supply/demand forecasts are not positive for the DRAM and NAND players like Micron (MU) and SanDisk (SNDK.) At these levels most analysts are pointing to a bottom in these names and a chance to buy them into an improving supply/demand balance which brings better pricing and improved earnings for these companies.
The problem that I have with this line of reasoning is that everyone knows that the industry balance is fragile and very cyclical. There was a time from 1992 to 1995 where memory (and semiconductors in general) were said to be growing based on secular demand trends. This propelled earnings and the stocks to huge and sustained gains. There may have been a little price fixing around this period but we’ll let that one go.
Since then it just seems to be very easy for companies in increase supply when prices look like they will be slightly attractive. A holder in Micron stock would actually be down today versus the price paid anytime in the last 10 years. So where is the secular growth story here? Lots more bits are shipped every year but at an every declining price per bit.
The commodity run has investors saying that maybe memory will work this way too since we aren’t adding to capacity at these prices. This parallel is problematic in part because one has to discover sources in commodities and the costs and lead times required to deal with the physical and hazardous extraction and processing are fairly high. While a brand new fab is not cheap, there seems to be plenty of capacity for increases in production by starting up or adding new lines.
SanDisk at least has evolved into a memory company with a consumer retail facet and trades at a much higher multiple of sales than a pure commodity producer like Micron. However the same logic about better supply and demand applies here. Even if everyone is right and SanDisk has a big December quarter due to higher revenues and slightly better margins, nobody will think it can be sustained so the multiple stays low and the stock appreciation is limited.
If the commodity producers don’t have strong pricing power then the argument favors the branded device makers like Apple, Research in Motion and even Dell over the component suppliers. If memory is cheap it also helps move units and provides software makers like Microsoft very favorable revenue and margin dynamics that are more sustainable.
We welcome arguments to the contrary but we haven’t owned Micron since the mid-90’s and have been tempted by SanDisk but always scared off by what seems to be the same long-run truth about the memory business.
– Kris Tuttle
Tags: Micron, SanDisk, MU, SNDK, Apple, Microsoft, Research in Motion, Dell
by Kris_Tuttle on May 11, 2007
MEMC (WFR – $54) has been in the news lately thanks to its recent quarterly report, which was — just as expected — sending the stock down nearly 20%. It was thanks to the researchers at MIT that we discovered something special about silicon described in our February 6, 2006 report. We highlighted “fast silicon” and the obvious investment play MEMC, which at the time was changing hands at $28/share. WFR dutifully climbed to $67 over the subsequent 14 months. Admittedly most of the enthusiasm from MEMC is as a supplier to the booming market for solar energy. However, our thesis was and is based on continued secular increases in demand for silicon and the increasing value-add possible at the wafer level. Silicon is by far the leading material for making semiconductors. It has allowed phenomenal increases in density and offers very low power dissipation. However silicon has one significant drawback. Turns out that electrons move fairly slowly in silicon vs. other materials such as gallium arsenide. Engineers have been forced to make a trade-off between high-speed/high power consumption materials and slower, more efficient silicon. Obviously there is strong desire to have the best of both worlds — high speed and lower power dissipation. By changing the lattice structure of silicon by a fraction of an angstrom, electron mobility is improved tenfold. The basic fact is that by turning raw silicon wafers into highly engineered substrates, great advantages can be created and consequently increase the value added by a supplier like MEMC. Most view MEMC as a commodity play on what has been a tight market for silicon supply. It’s true that these conditions create an even better short-term story for MEMC, but to us the longer-term opportunities in more engineered products is far more interesting. We know:
- There are big competitors out there.
- That market prices for silicon will be volatile.
- And that other, even more advanced technologies, could replace silicon in the very long-term.
However, we also know the opportunities in silicon for MEMC are at least as good as those in other parts of the semiconductor value chain with less competition and real switching costs in the more complex segments of the market. – Kris Tuttle
Tags: MEMC, Silicon, Solar