My only hope for this call with Vitesse Semiconductor (NASDAQ:VTSS) was that I would not be surprised. In the absence of any information from the company since November 6 2006, I discovered my mind is capable of generating some frightening scenarios. The last thing I wanted to see was one of those scenarios realized. None were.
• Consumption was 60-62M. Historically I take the midpoint number for all calculations, yielding the following product line growth:
• Opex cut radically from 33M to 28M. If I had realized the magnitude of the cut during the call I would have asked what projects were rationalized to make this happen. Opex was $42.7M 12 months ago, a reduction of 34%
• Capex was $2.6M, $1.4M for lease and $1.2M for masks (low)
• Cash at 16M, down 9.6M. Cash burn of 4M due to expanding inventory, 4.8M professional fees. Payables grew 1.4M too, so actual burn was around 11M.
• I have questions into the company about interest payments.
Qualitative & Colorful Analysis (because investing in Vitesse will drive you insane without it)
• Increased ‘consumption’ (Vitesse-speak for revenue until an auditor is hired and they can remove their financial training wheels) was the best news of the call. While the growth rate was not as good as last quarter, considering the struggles of others in the industry, this was a good result.
• As before, no margin guidance was given. The company indicated distribution inventory with channel partners like Nu Horizons Electronics Corp. (NUHC) was drawn down substantially. As readers of this blog know, nothing kills margins faster than greedy use of distribution. A reduction of channel inventory will impact cash in the short term, but long term will enhance margins by at least 3-4 pts. I will wager their gross margins are in the 58-59% range. As stated in the past, Nu Horizons is facing a big headwind as Vitesse rationalizes its business.
• If my margin assumptions are correct, the company is break even excluding professional extortion expenses.
• Please, not another quarter of multimillion dollar professional expenses. Just think of how those expenditures are viewed by employees on the inside; Cash controls must be tight to the point where you can’t get paper for the laser printer, but $5M gets paid to guys who are 10 IQ points away from “Would you like Fries with That.”
• The best thing I heard was the imminent board changes. Mayor McCheese would be an improvement.
• Cash is tight but company indicated inventory growth is over, and professional extortion expenses are rapidly declining. If revenue stays flat, and the company can hit these two targets, they should be cash flow neutral. Executing this plan should be the most important goal for the company and I wish I heard that on the call.
• Brief but significant mention of additional financing. I don’t know what to make of this other than their customers are not comfortable with a razor thin cash margin. My guess is they are looking to open a line of credit. This is fine by me so long as no temptation exists to spend it. If Nu Horizons can finance inventory at LIBOR +1-2% I see no reason why Vitesse cannot. I hope that this is what the company does, and I sure hope they don’t use it.
In an environment where comm semi companies briefly emerge from the surf before being pummeled along the post-bubble reef of telecom wreckage, Vitesse appears to be treading water against tough odds. I’m much more positive today about the company than I was last August at a lower market price.
Key Priorities for FQ207 (Unfortunately, two weeks from closing . . . )
1. Reduce cash burn by eliminating professional waste fees and burning off inventory.
2. Aggressive pursuit of M&A of valuable units such as Ethernet in order to catalyze industry consolidation. Placing the assets of this group in a larger, better funded existing operator would be a win for everyone.
3. Hire an auditor. Get audited results. Plead for mercy from NASDAQ.
Full disclosure: Author is long Vitesse Semiconductor.
VTSS 1-yr chart