Actel Corporation (ACTL) held its annual shareholder meeting on June 5, 2009 at a Santa Clara hotel. Although around eighteen people attended the meeting, I was the only non-employee there.
CEO and President John East gave a slideshow presentation. It appeared that the presentation had been shown to everyone else in the room the day before. Mr. East is a tall man, more Texas than California in his demeanor--friendly, direct, and unreserved. (In case you're interested, here is a 2008 interview with him.)
The meeting began with Attorney David Foster introducing various Actel employees. As part of the formal portion of the meeting, several directors were nominated, and shareholders increased the number of shares reserved for issuance by two million shares. CEO East then began his presentation.
Before I summarize Mr. East's presentation, I will provide some technical background. Actel makes FPGAs. FPGA stands for "Field Programmable Gate Array." A digital gate is a combination of many transistors to make a function such as an inverter or flip flop. Hundreds, thousands or even more digital (or recently analog) cells make an FPGA. FPGAs are useful because companies can configure their desired circuits to make a system application by pick-and-choose or by cut-and-paste.
RAM stands for Random Access Memory (vs. ROM which is Read Only Memory). There is Static RAM, Dynamic RAM, etc. which are digital (logic) circuits. These are used in the computers and other electronic systems. (Mr. East mentioned several times that Actel was focused on the "static" end of the market, and I assume he was referring to Static RAM.)
Two ways of measuring an FPGA are by reviewing its clock speed and data rate. Actel's FPGA "clock" speeds of 200MHz (its low power design) and 350MHz are very good. However, in many data communication applications, "data" speed (or data rate) of several gigahertz (1000 megahertz) are common now. To get a more complete picture of Actel's FPGAs, I should have also asked questions about data speed, which I did not do; however, in pure digital systems, clock and data speeds tend to be very close.
In contrast, in mixed (digital + analog) systems, such as data communication applications, the data rate is usually many times the clock rate (speed). Actel indicated clock speeds of 40 to 60 MHz in its mixed-signal product.
Getting back to the presentation, Mr. East talked for about forty minutes while explaining the various slides. I will do my best to replicate the main points of the presentation.
No debt: Actel has no debt and 140 million dollars in cash and investments.
Broad customer base: Actel has 3500+ customers. 60% of Actel's revenues come from around 1000 customers. [Note: 10K, page 26: Lockheed (LMT) is a major customer. "Lockheed Martin accounted for 4% of our net revenues during 2004 compared with 11% during 2003."]
Niche markets: Actel is not "going after what the big guys [Altera (ALTR) and Xilinx (XLNX)] are going after."
Static v. Dynamic: Actel is better when it comes to static power.
Survey says: "Which vendor best addresses power consumption" problems in FPGAs?
Xilinx: 27%; Lattice Semi: 6%; Altera, 22%; Actel, 22%.
Flash: Flash is growing, but at a slower rate than anti-fuse.
Slow but steady?: Actel is "gaining share, but not at a rapid pace."
Long-term customers: Actel has many long-term customers in the military, industrial, and medical markets. At the same time, some of these customers have external complications, such as necessary FDA approval, that prevent immediate sales. As a result, although Actel is actively trying to gain more long-term customers, the time it takes to gain such customers may cancel out any immediate revenue effect.
Vision: CEO East talked about how the "whole world is moving" in the direction of "portable" products, i.e., handheld and battery-powered devices. (The cellphone is an obvious example of this movement.) Mr. East mentioned that he had just seen a portable medical device the size of his thumb. (Quite a change from the days of large, immovable medical equipment.) He mentioned that some restaurants are no longer using pen and paper but are taking orders on portable devices. He provided many examples of Actel's ability to grow in the future as more devices become smaller and handheld.
Acquisitions: Mr. East talked about Actel's acquisition of Pigeon Point Systems and the possibility that the TCA (Telecommunications Computing Architecture) standard would become industry standard.
I asked several questions. I mentioned that around 40% of Actel's revenues came from the military and aerospace industries. (See 10K, page 25, "[S]ales of our products to customers in the military and aerospace industries...accounted for 38% of our net revenues in 2008.") I asked how the cancellation of various projects would impact Actel. I mentioned specific projects, like the F-22, which had been scaled back or canceled.
This is where it got a little confusing. All CEOs, including the honest ones, are part-salesmen. No CEO wants to admit that problems might arise as a result of government spending cuts. As a taxpayer, I am quite happy President Obama is scaling back some defense programs. (See here for more on this issue.) Actel shareholders, however, probably understand that certain military / aerospace cuts may impact Actel's ability to grow.
Mr. East did not mention any particular defense program cut that would impact Actel's revenues. Mr. East seemed to say that Actel's product line was diverse enough so that the "cumulative" effect of defense spending cuts would not be significant. Even so, if I was a mutual fund that owned millions of shares, I'd ask Actel to break down exactly how much money it was expecting from each of its defense projects. That breakdown would give a fund manager a better idea of what to expect from Actel moving forward.
Mr. East did mention that "95%" of American-launched satellites used some Actel product. That's an incredible achievement. Mr. East mentioned that there were many civilian satellites, such as weather satellites, and scientific satellites, such as Pluto explorations. His point was that even if the military cuts back on its defense spending, civilian projects would probably continue to give Actel revenue.
I asked about Actel's efforts to diversify its upper ranks. There were only two females in the entire room, and one of them appeared to be a non-executive employee. If I saw a company with 18 women and 1 male in upper management, I'd be concerned, so I asked Mr. East what he was doing to improve diversity. Mr. East seemed a little uncomfortable with this question and first joked that if I was discriminating against older white men, he was going to call his lawyer to come after me. He then pointed out that Actel had some Egyptian and Lebanese employees in the room, and the overall racial composition of Actel's employees was very, very diverse.
When I pressed him further on why there weren't more women in the room, Mr. East became more serious and indicated that there was a "dearth of American-born female engineers." In probably one of the best comments made by a CEO I've heard, he said he didn't have a company car, he stayed in cheap hotels, and he didn't have an executive jet, but he "liked his engineers." His point was that he hired good engineers, no matter what the ethnicity or gender.
As he became increasingly more uncomfortable, the sole female manager piped in. She made some excellent comments about how the company wanted to add diversity naturally, not "artificially." She said that in the nine years she had been with the company, Actel had "never" had a hearing before the OFCCP (the OFCCP ensures that federal contractors do not discriminate). Her response was excellent, and having a female employee save the CEO from his discomfort showed that Mr. East was respected within Actel's upper ranks.
Although I enjoyed the CEO's presentation, I will not be buying more Actel shares. When it comes to technology, you want to go with the leaders, and Xilinx and Altera appear to be the leaders in Actel's field. That doesn't mean Actel won't survive or even thrive, but it appears to have made a conscious decision to move away from competing with Xilinx and Altera. That means Actel will probably focus more on lower-growth areas, where the larger players have exited. To give you an idea of the size difference between Actel, Xilinx and Altera, Actel's market cap is around 300 million dollars; Altera's is around 5 billion dollars; and Xilinx's is around 6 billion dollars. Maybe Actel will eventually decide to play the part of David and slay the Goliaths. Anything's possible in this topsy-turvy world of ours. Right now, however, Actel does not appear to be able to grow at a high enough rate to justify a massive upside in its stock price.
Miscellany: Actel invested in Lehman Brothers' bonds and only recently wrote off the investment. See 10K, page 49: "The total impairment charge of $0.9 million is included in interest income and other, net on our consolidated statement of operations for the year ended January 4, 2009."
Disclosure: I own an insignificant number of Actel and Xilinx shares.