Irish Chip Designer Stretching Itself Too Far?
By Robert Cyran
01/30/2001 12:31 PM EST
It's hard not to feel a little jealous of people who work for
Parthus Technologies (PRTH). The company's
headquartered in ultra-hip Dublin, is growing quickly and
works in the relatively sexy area of designing chips for new
mobile devices.
It signed 32 licensing deals last year, and Parthus will
receive royalties on 26 of them. Even better, the price paid
per license has risen to about a million dollars apiece and
royalties have started trickling in. Investors certainly are
bullish. The shares have gained more than 50% since
May's ADR debut.
Before you invest, you probably should take a harder look
since its fourth-quarter results released this week aren't so
flattering. While revenue rose 68%, operating expenses
rose 170%. In fairness to Parthus, I should point out that
earnings will be heavily back-loaded. Nonetheless, it's
hardly a blowout quarter.
What's more worrying is that the company is selling at an
extremely rich 45 times sales. There's too little room for
error in the price of these shares.
Strictly Designs
Parthus earns its keep by helping solve a problem in chip
design. Namely, chips are advancing faster than teams can
develop them. A chip's complexity doubles every 18
months, and designers can't keep up. Aggravating the
problem is the increasing pressure designers feel to get
their products to market quicker.
The solution is to reuse designs. This way, designers can
spend their time adding value, rather than duplicating
what's already been done.
Parthus never manufactures the chips itself. As a result, it
doesn't have to spend vast amounts of money on building
semi-conductor plants. Instead, intellectual property (IP)
chip designers like Parthus spend lots of money on R&D to
develop chips.
This cost is the same whether one or many companies
adopt the design. Since the marginal cost is close to zero,
any additional sales fall to the bottom line. Earnings rise
sharply as more companies license chips.
Just a Slight Twist
Parthus has a slightly different model than other IP chip
makers. Companies such as MIPS Technologies (MIPS),
ARM Holdings (ARMHY) and Rambus (RMBS) concentrate
on designing blocks of technology. Companies take the
block and integrate into their chip.
Parthus, on the other hand, combines its own proprietary
technology with licensed technology. Parthus specializes in
turning chips for mobile devices into platforms for things
such as global positioning systems (GPS), MP3 players,
high-speed data transfer and Bluetooth communication.
It's goal? Parthus wants to be regarded as the expert in all
of these technologies. Since these technologies are all
coming together on portable devices, Parthus hopes to
license out chips combining all its specialties. Parthus
would receive bigger royalty payments and have a deeper
relationship with its partners.
Sounds good so far, but it's a daunting goal.
Too Many Cutting Edges
Parthus may have problems selling its whole suite since it is
so varied. It will require lots of research and development
and quite a bit of luck to have the best design for each
technology. A more reasonable assumption is Parthus has
an excellent design for Bluetooth, but only an average GPS
design, for instance.
"It's going to be very difficult for Parthus to keep on the
cutting edge of all these technologies… customers aren't
going to scrap all their hardware and software development
for an average solution," says Laura Baker, an analyst with
UBS Warburg in London.
The company has had some success with the portfolio
approach. On the same day it announced earnings,
Parthus signed a licensing agreement for 3Com (COMS) to
use several of Parthus' platforms in combination in its new
wireless devices.
Unfortunately, 3Com has had a large investment in Parthus
for quite some time. It will be much more significant if a
company without a stake in Parthus chooses its portfolio of
technologies.
Flagship Going Down?
Parthus may end up winning a large portion of the market
but it's too early to say. There's no assurance Parthus will
do what the market expects. Given the valuation attached,
an event in November looks troubling.
That month, STMicroectronics (STM), Parthus' largest
customer at 40% of sales, chose to license another
company's design for the next-generation chips for mobile
phones. Although STM may eventually license Parthus'
design as well, it doesn't look good.
Says Baker, "It's a pretty negative signal to have your
biggest customer turn to someone else for your flagship
product."
Based on valuations, investors would be better off picking a
more established chip design firm such as MIPS
Technologies or ARM Holdings. |
