Message 17277134
TEXT-Moody's cuts Vitesse Semiconductor ratings
(Press release provided by Moody's Investors Service)
Approximately $441 Million of Debt Securities Affected.
NEW YORK, April 2 - Moody's Investors Service lowered the ratings on Vitesse Semiconductor Corporation <VTSS.O>
(Vitesse), concluding a review commenced on February 22, 2002. The ratings outlook is negative. The following ratings are
affected: (i) Rating lowered to B3 from B2 on Vitesse Semiconductor Corporation's $441 million 4% convertible subordinated
debentures, due 2005; (ii) Senior implied rating lowered to B1 from Ba3; and (iii) Senior unsecured issuer rating lowered to B1
from Ba3. The ratings downgrades take into account Vitesse Semiconductor's focus on supplying high-performance integrated
circuits (ICs) for use in telecommunications and storage technology, and the severe retrenchment in capital investment currently
affecting those end use markets. Though Vitesse has reduced its quarterly breakeven revenue rate to $70 million through the
implementation of two restructurings during FY2001Q3 and F2002Q1, revenues are expected to remain well below the
revised breakeven level for the near-term. Revenues of $39.2 million for FY2002Q1 ended December 31, 2001 were down
76.3% from peak revenues in FY2001Q1, and are expected to range from $39 million to $43 million for FY2002Q2.
Moody's is concerned over the company's continued draw down of cash in the absence of end-market visibility, and the
prevailing belief that a recovery in information technology capital spending will be deferred until sometime after an overall
economic recovery is in evidence. A recovery in wireline telecommunications capital investment by the incumbent service
providers is expected to be even more gradual. While Vitesse will no longer be under review, Moody's plans to monitor the
company's performance against guidance, most notably the company's expectation of achieving breakeven on a net basis during
its FY2003Q1 ending December 31, 2002. To the extent that performance deviates significantly from the company's forecast,
and high technology and telecommunications investment remains mired in uncertainty as of that time, a further downgrade could
be warranted. For the moment, Moody's concerns are mitigated by the company's substantial liquidity, with $555 million cash
and investments available as of December 31, 2001; the substantial interest income being earned by these investments; and
Vitesse's moderately leveraged 41% debt to capitalization, after adjusting for the company's consolidated tangible net worth.
Vitesse's net cash position, after accounting for $441 million of outstanding convertible subordinated notes as of December 31
2001, was $114 million. The negative outlook anticipates continued cuts in communications carrier spending, and uncertainty
over whether a significant proportion of the company's 150 reference designs awarded in FY2001 will gain traction with OEM
customers. The ratings also reflect the intense competition within the high-performance communications IC market, and the
inexorable pressure on sustaining research and development expenditures in the wake of contracting revenues. For the LTM
ended December 31, 2001, Vitesse's engineering, research and development expenses represented nearly 65% of revenues.
Vitesse competes with specialized communications IC vendors, including PMC Sierra, Applied Micro Circuit, Broadcom, and
Conexant, as well as more diversified and substantially capitalized semiconductor concerns such as IBM Microelectronics and
Intel. Nevertheless, as original equipment manufacturers (OEMs) have pared their internal ASIC (application specific integrated
circuit) design teams to reduce costs and concentrate their resources on systems architecture, the market opportunity for
application specific standard products (ASSPs) incorporating more complete solutions over the optical carrier hierarchy has
expanded. The key for Vitesse is to be able to successfully transition from high speed physical layer products which are
becoming more commoditized, to offering both upper layer products and chipset modules in which areal proximity and a
common interface translate into better performance and significant cost reductions for customers. The ratings also recognize the
substantial investment in capital expenditures made in FY2001 - $153 million, $111 million of which was spent during
FY2001H1 - and the subsequent $47 million write-down of gallium arsenide (GaAs) wafer fabrication and testing equipment in
FY2002Q1. The change in strategy from providing physical layer components to offering more complete solutions featuring
upper layer network processing and switching functions has led Vitesse to transition towards complementary metal-oxide
silicon (CMOS) process technology to meet the functional and time to market requirements of its customers. The company
expects a continued diminution in revenues from products based on GaAs process technology, particularly as the yields and
speeds associated with CMOS process technology continue to improve. The outsourcing of products based on CMOS
processes to outside foundries, primarily TSMC (Taiwan Semiconductor Manufacturing Corp.) and IBM, will facilitate the
draconian reductions in capital expenditures planned for FY2002 and FY2003. CMOS based products contributed
approximately 77% of FY2002Q1 revenues. The company provides its own foundry services for indium phosphide (InP)
process technology, currently in the early stages of development, and is poised to benefit once the deployment of next
generation, high speed communications equipment operating at OC-768 or 40GB/s speeds gains momentum. The ratings,
however, are buttressed by Vitesse's ability to transcend the GaAs process technology which figured prominently in its
OC-192 products, and successfully integrate upper layer intelligence into its devices, as its recent record of design wins would
attest.
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