*AV* -- I just got off the IDTI Quarterly conference call today and they beat estimates (3 cents vs 1 cent) mostly due to around $2 million in extraordinary income from their insurance company (a 1994 claim). However, it would have been 8 cents without the gain and if they hadn't done as much R&D for the future..... This is a flavor of the confusion that went on during the conference.
Don't get me wrong. There was a great deal of good stuff and good things that are coming down the road. However, the presentation skills of the presenters get a grade of D- at best. The call started off with apologizing for the delay in atarting the Zilog conference call from the CEO. Whoa, doesn't her know the name of his company. Or was it a Freudian slip on his part. Nowhere else was ZLG mentioned in the conversation, even when they were talking about competitors by name.
Another gotcha was a question about capacity. Finally the number was given. The Oregon facility is running at 33% capacity but management could not approximate how much gross margins would improve if they were to run at full capacity. Not only that but the stated that the WinChip (C6-IDTI processor) shipments last quarter was less than the demand for the chip. As a matter of fact, this quarter their supply will still be less than demand. How is this the case if the fab is running at 33% capacity??? Why not rampo the fab up. The product is very well received and has more than 50% of the processors operating at 200MHz or above. They will go to tape (mask set) with the next rev of the device (improved performance characteristics) in both the 0.35u and 0.25u technology in February. The product is very well received and significantly smaller than the AMD chip. It is the most cost competitive product on the market and extremely compatible with both the hardware and software out in the marketplace. A comment was made that it was the most compatible of the INTC clones. Also they mentioned that their chip not only was smaller than AMD's but had 2 less layers of metal interconnect (4 instead of 6 which really is significant) and is able to perform its functions with millions less transistors.
Do you see a major disconnect??? 33% cpacity but cannot ship enough to meet demand. No, I do not think it is a major yield issue. I think it has a great deal to do with creative numbers, IMO.
Classic joke: 3 guys walk into a hotel and rent one room. Clerk says it will cost $30, so each one forks over a $10 bill and they go to the room. Later, the manager realizes the clerk made a mistake since the room charge should be $25. He sends the bellhop up to the room with the $5 refund. Bellhop can't figure out how to divide $5 three ways and comes to this wonderful compromise. He gives each man $1 and pockets the remaining $2. Therefore, each man paid $9 for the room and the bellhop kept $2. Well we all know that 3*9=$ 27 plus the $2 the bellhop kept makes $29. Where did the other $1 go to?
Back to IDTI. The CEO was questioned about capacity, in genral, and stated that the Oregon plant would be capable of doing 10 million square inches of silicon per year, nearly twice the output of the other 2 California plants which could only produce 5 million square inches. He also mentioned that the Oregon Plant, running at 33% capacity was producing about 3.3 million square inches of silcon on a yearly basis. Well here's the rub, I think. Fully outfitted, the Oregon plant will be capable of producing the 10 million square inches but the plant is not fully outfitted. Somewhere last year we came to the conclusion that the plant (brick and mortar structure) was in place but only half of the structure was facilitized for wafer fabrication and the other half was most likely a shell for future expansion. Of the 50% that was facilitized only about 50% of that was equipped for manufacturing leaving about an additional 50% capacity to grow into with additional equipment purchases. This off the cuff assessment meant that only 25% of the projected total capacity was being used.
Remember my comments about being all dressed up with no place to go last year? A fab that was ready to be ramped but was waiting for products to run. Well, I beleive they have 3 types of products ready to run and have successfully ramped up the fab and are adding additional equipment. The CEO already stated that they would spend all of the ~ $140 million in capital equipment before fiscal year end and that close to $40 million was spent in QTR3. They are adding more equipment as we speak. Factor this with the additional comments that this qtr will produce more than last qtr and next qtr should see an improvement on this quarter.
Seems to me the fab is ramped up to full capability now and that additonal capcity is being brough on line with new equipment purchases. I think they are close to being capacity constrained finally and that they cannot run more wafers today and will need a combination of yield improvement and further equipment installations
to increase shipments down the road.
I could be wrong but I think a few mirrors were placed in the funhouse and you needed to look beyond what was said, how it was stated, and ask the RIGHT questions. No one asked the simple questions like "How much is it going to cost to run Hillsboro at 100% of its designed capacity??"
I am beating them up on presentation skills and possibly confusing the audience or helping the audience draw the wrong conclusions. Why else would you say "We are supplying all that we can at this time but it does not meet the demand" in one breath and say "We are running at 33% capacity".
I think (Key words I think) they have increased their capacity from 25% of the designed total capacity to 33% ove the past few quarters. I also beleive they are bringing in new requipment to bring this facotory up to 50% of the total capability then will go back and facilitize the rest of the building shell.
One other comment. The CEO admitted to 8 very disappointing quarters much of which was due to R&D expeditures and state of the art expeditures in the form of new manufacturing, new equipment, acquisitions, and new products. Going forward, the company is going to focus on cost reductions, yield improvements, and margin performance such that earnings grow substantially as a percentage of
revenues. Obviously they will be looking quite heavily in improving margins. It looks as if they will be reducing the overall percentage SRAMs are of their overall buainess but not get out of the business totally. They recognize the pricing pressures that are associated with SRAMs.
All the above is to be considered negative comments which could and probably will affect the perception of this company by the analysts and investors resulting in poor price appreciation. It seems they came to the debutante ball in ripped jeans and a dirty tee shirt even though their last name is Rockerfeller. Everyone will be looking down on them.
Now the good -- IDTI is properly staged for greatness if you look beyond the poor presentation and evasiveness of the conference call.
Many times they were giving us the impression that they were going to "under promise so they could outperform". Clearly they have a number of great things to report:
1. 3 types of products that will be transforming the company from an SRAM company to a more diversified company (MicroP, ClearLogic, VideoGraphics). They have likened some of these products as oil wells that have struck oil. therefore there is no need to drill more wells at this time but rather go leverage the exiting wells for all that they have at the present time. In other words, cash in on their R&D expenditures and leverage those products further.
2. The platforms on which the above products were developed are extremely sound, very manufacturable, and exptremely competitive, in their opinion. In other words, they believe their customers like what they see, can live with the price, love the quality AND to top it all off, IDTI thinks they can make it a good margins, high yields, and in one of the most manufacturable processes available.
3. They have an 8 inch fab that is being expanded with state of the art equipment and have immediate room to expand further without having to build another brick and mortar structure.
4. The existing wafer fab in Oregon is close to, if not already at, full capcity given the installed base of equipment. Any efficiencies (cost, yield, cycle time) will lower wafer costs. However, additional equipment within the existing fab area will increase capacity and reduce the fixed cost segment of overall wafer cost. Considering the age of this fab (relatively new), this could be significant when you think about the depreciation costs per wafer alone. Every added wafer out, die yield improvement, etal will have a healthy impact on gross margins, profitability and earnings.
5. They can go into full production on the most advanced 0.25u technology and are already delivering SRAMS at this technology. This puts them in the forefront of their competitors, even though it is a cutthroat business.
6. For all his lack of stellar presentation skills, the CEO was very clear that, going forward, there were going to concentrate efforts on improving margins, increasing profits, reducing costs, increasing yields and improving earnings for the company without necessarily having to grow revenues to do that. He also statewd that they will be looking very carefully at those segments of their business that do not return the types of numbers they desire and move away from them in favor of the more lucrative segments. He expects that by this time next year, there will be a transformation in the product segment breakouts.
BOTTOM LINE: Fundamentally this is a strong comapny that will provide go price appreciation if they stay on schedule and deliver what has been alluded to by the CEO and his financial staff. All of it makes sense to me. Technically-they comported themselves like a couple of "escorts" hawking a date promising a great date while telling you how ugly they were prior to their face lift and promising you they are now disease free. Kinda scares you away from the date, doesn't it???
Therefore, I will be watching for what I beleive to be a retracement in this stock over the next 5 days and look for an entry point in the 9.5 to 10.25 range, if possible.
POST MORTEM: This is one good company in the need of a real good public speaking CEO with a flair for the street. Don't discard the technical genuis occupying the office now but rather put him out of the public eye and into where his talents are best suited; the technical aspects of the company. This is the second conference call where I came away with this feeling. Either that or have a COO present the quarterly numbers or give the present CEO a script to read from until he hones his skills. Well worth considering since his "next question" abruptly cut off some of the people asking questions. No disrespect is meant toward the CEO and this is just one man's opinion of how well IDTI was dressed for the dance to today. Nice dress but it was stained and she had a big zit on her nose.<GGG>
My apologies if a feather or two are rumpled but it is an honest constructive opinion.
Andrew |
