N. DAMODAR REDDY - ALLIANCE SEMICONDUCTOR - (ALSC)
CEO Interview - published 01/09/01
DOCUMENT # LAQ264
N. DAMODAR REDDY co-founded Alliance Semiconductor and has served as the company’s Chairman of the Board, Chief Executive Officer and President from its inception in February 1985. From September 1983 to February 1985, he served as President and Chief Executive Officer of Modular Semiconductor, Inc. From 1980 to 1983, Mr. Reddy served as Manager of Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of Honeywell, Inc. Prior to that time, Mr. Reddy held various research and development and management positions at Four Phase Systems, a subsidiary of Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. In 1995, Alliance Semiconductor was named by Fortune magazine as the eighth fastest growing company in the United States, and Mr. Reddy was selected as Entrepreneur of the Year in Northern California, an award sponsored by Inc. magazine, Ernst & Young and Merrill Lynch. Mr. Reddy is a member of the board of directors of Sage, Inc. and a number of private companies. Mr. Reddy holds a MS degree in Electrical Engineering from North Dakota State University and a MBA from Santa Clara University.
Sector: Semiconductors
TWST: Could you give a brief overview and history of Allinance Semiconductors?
Mr. Reddy: The history of the company is that we started in 1985 to participate in the emerging markets for SRAMs, DRAMs and Flash. Intially, the company focused on SRAMs to participate in the PC market.We became one of the largest Flash memory suppliers by 1995, we dominated that market. We went public with our IPO in 1993, and also went through a couple of follow on offerings. We are a fabless company, and we more or less outsource all of our manufacturing. Funding manufacturing was a problem back in 1995, so we invested almost $150 million in joint venture wafer fabs. One joint venture is in Taiwan with UMC and the other one is Chartered Semiconductor in Singapore. The fair market value of this investment is roughly over a billion dollars as of September 30, 2000. To date the company is not only a supplier of SRAMs but also a DRAM supplier to P.C. and as well as communication markets. That includes SRAMs, DRAMs and, to some extent, flash. That is the status of the company. Beyond this, because of diversification reasons, we have a lot of problems in getting competent technical people into the company, so we are investing in start-up companies to diversify our product portfolio. In the last couple of years, we invested roughly $80 million in well over 30 start-up companies. Three of them went through acquisitions during 1998 – 2000, which created an equity flow of $200 million into the company.
TWST: Will acquisitions continue to play a part in your future?
Mr. Reddy: Yes. Today, I think, our focus, investment-wise, we are looking into networking communications and the wireless area. At the same time, we have well over $1 billion worth of securities. Based on that, we will be looking seriously into acquisitions of some synergistic companies in the future, also.
TWST: What are the most significant trends, developments and changes that you anticipate in the marketplace?
Mr. Reddy: I think the critical thing is, we were a PC-centric company. We went through a transition until 1999 to become a communications-centric company. Going forward, I think that’s the area we want to be in. Really, the networking and the wireless area are going to be dominant areas, and those are the areas where we are focusing today, and our products are going to be catered toward those markets.
TWST: What are the risks involved?
Mr. Reddy: Financially we are very strong, and there is no doubt about that. The cyclical nature of the semiconductor business is not going to change. Still, I think we see this as, it may not be a 1996-1998-type downturn, but slower, shorter duration cycles are going to be there, and that’s what we are seeing. The December quarter, we are seeing some softness, and in the March quarter I think we will see some softness. Beyond that, the summer is going to be there, and generally, I think, for the semiconductor industry the summer will start a little bit soft. My feeling is that we will see strong growth coming back for the September quarter. Otherwise, I think we are doing exceptionally well as a company. Positioning is very, very important to future products.
TWST: How do you think your R&D expenditures will change in the future in terms of both amount and emphasis?
Mr. Reddy: R&D is critical to our model. We have to invest in R&D of memory designs, and technology to maintain our leadership position. At the same time, R&D expenses as a percentage of revenue go down when revenues are growing. At the same time, we have to build a strong design organization within the company. We are focusing on the design side, and our joint-venture partners are focusing on technology and we work with them very closely. Our R&D expenses are going to be under control, and that’s one of the nice things with this model.
TWST: What are the competitive advantages that Alliance Semiconductor offers?
Mr. Reddy: That’s one thing I want to emphasize, why we are different from other companies. We have three memory product lines. One is the SRAM product line, and we want to be the dominant company there. We should be as good as anybody out there in the world as an SRAM supplier, whereas in the DRAM area we don’t want to compete with the major mainstream commodity-DRAM companies, but we want to be in the legacy area — “legacy,” meaning that we want to supply non-PC segments of the market, like telecom and networking, those are the focused areas. As far as Flash is concerned, I think, we want to be eventually a mainstream Flash company. Beyond that, I think our focus is going to be on a highly memory-intensive, logic type product company. That’s the segment that we are focusing on today as far as our investments are concerned. Eventually, my goal is for the company to get into that market by acquisitions or by direct investment in some of the start-up companies where eventually we may want to acquire them. In the last two or three years, if you look at most of the mainstream public companies in the semiconductor industry, there is a tremendous drain of manpower. The average turnover rate in the Bay Area is somewhere around 25%-30%, we have seen over 20% turnover every year for the last two or three years. So the challenge is to keep that talent which is here and, at the same time, to hire the best people from outside. Building the organization is as critical as developing new products in this environment.
TWST: What kind of a culture have you developed at the company, and how successful has it been at keeping people?
Mr. Reddy: The key thing is that we have to challenge our people. Somebody who is really motivated will see the challenge in this company. Another thing is that we try to give opportunities to people doing jobs beyond their competency. In other words, if you look at the design team, in this company we allow design engineers to go from the start of the design all the way to putting products into production, so they know exactly what is needed — ultimately, even the customer needs, so that if someone has a problem, I think our design engineers are able to fix the customer problem. That’s pretty unique in this industry, as far as we are concerned. Those are the things: that you have to work hard, that it’s a challenge, and that sometimes we drive our engineers very hard, but at the same time, ultimately what happens is that they become better engineers.
TWST: What specific achievements would lead you to characterize the next two or three years as successful for Alliance?
Mr. Reddy: The model we have right now is the right model. I think we’ve achieved everything we want to do. The only lacking part right now is strengthening our management team in this company. We have some holes; we have to fill those holes. The revenue base is growing. Yes, I think we have to build the infrastructure within the company to serve the customer. That’s very important. In this environment, I think servicing the customer is very important. Simply, what is happening is that even our end customers outsource their manufacturing. So in other words, what happens now is that every product that goes out of this company has to be a robust product. That is very critical: Who ever provides the best service? Who ever has the robust product? They are going to be the winners.
TWST: How do you feel about the valuation the market is currently placing on your stock?
Mr. Reddy: That is one of the problems we have. I think it is a major concern I have. The company has an investment model as well as an operational model. People are not giving any credibility or value for an operational model. Today, I think Alliance’s stock is $14. The asset values in this company are well over $20 per share, whereas, the stock is selling below book value. At the same time, I think, we are highly profitable right now. We are not getting any multiples for our operations. Unfortunately, it is the problem. I think we have to work on that. The problem is that we don’t have that many analysts following the company. At the same time, we better communicate our model to the investors.
TWST: What two or three reasons would you give long-term investors to buy stock in Alliance Semiconductor?
Mr. Reddy: The stock is selling well below book value. That is a very comfortable thing for any institutional investor who is looking for an asset-rich company. At the same time, based on outsourced manufacturing models, the company’s operating model also is most attractive to a long-term investor.
TWST: Thank you. (RF) |
