Has everyone seen this latest report??
Situation Summary:
IMP Inc. is an Analog Integrated Circuit (IC) or Chip Manufacturer whose rise and fall was tied its
dependence on too few customers. The company invented a chip used in Iomega's (once) highly
popular ZipT drive for personal computers. IMP's stock hit an all time high of $23.50 per share early
in May of 1996 when forecasts for the Zip drive were still in an up trend. Unfortunately when Zip
drive sales projections were suddenly scaled back, IMP's stock went into a free fall because more
than 40% of its revenues were from this single product. In spite of the collapse of its stock price, and
the loss in revenues, IMP has all the elements necessary for a successful turnaround: a new CEO with
significant industry experience, a well articulated turnaround plan, adequate financial resources to keep
the company alive while the turnaround plan is effected, and the ability to be a market leader in a
growing market niche. The stock has rebounded by 90% off its December lows due to lower than
expected losses in the third fiscal quarter. We expect some consolidation in the $1.00 to $1.25 range
giving investors a chance to accumulate a position for a three to five year move to the $5.00+ range.
The Business
IMP Inc. designs and manufacturers analog and mixed-signal chips for data communications interface
and power management applications using its state of the art analog manufacturing process
technologies. In addition, the company provides wafer foundry services on these same processes to a
variety of other chip makers.
Founded in 1981 as International Microelectronics Products, the company's early years were devoted
to developing and manufacturing custom application specific integrated circuits ("ASIC's"). The
company was a pioneer in this business being one of the first to extensively employ computer aided
engineering in the design process. The company went public in 1987. In the early '90's the company
focused its resources on using its expertise to offer foundry services to other Integrated Circuit
manufacturers - helping with the design and production of the wafers used to create "computer chips"
and ASIC chips. By 1993 the company derived most of its revenues from this business segment.
Profits from this segment were used to develop the chip for Iomega. Sales averaged $53 million each
year between 1988 and 1994 and the company's stock rarely traded over $3.00 during that period.
Sales reached $77 million in 1996 on the strength of sales to Iomega. After the stock collapsed in mid
1996, a new CEO was brought in to refocus the company. Going forward IMP will focus on two
business segments:
The company will continue to provide wafer foundry services to other integrated circuit
manufacturers. Such items include power chips for International Rectifier, telecom chips for Level
One Inc., data communications and power management chips for Linfinity Microelectronics, and until
recently, over 80 million modems for Rockwell. This business segment should provide an ongoing
source of sales and profits to fund the development of standard analog chips.
The second business unit is the development, manufacturing and sales of STANDARD (rather than
custom) analog and mixed (analog/digital) chips for data communications interface and power
management applications for which the company has extensive expertise and can eventually be a
market leader. To this end the company has hired a new Vice President of Sales and Marketing to
develop this business.
What Went Wrong
Like many turnaround situations, IMP got into trouble when its sales became dominated by a few
large companies with volatile products. IMP's fortunes soared through 1995 and into 1996 during
which period the company was providing chips to Iomega for their highly popular ZipT drives. By
early 1997 Iomega accounted for almost 40% of sales, with another 25% being provided by sales to
International Rectifier and Rockwell International. The company's stock, now at $1.25 per share,
traded as high as $23.50 in May 1996 before it became evident that competition for the ZIP drive
would lead to lower than projected shipments of that product. In addition, the company's sales to
Rockwell and International Rectifier declined significantly, although sales to IR have since recovered.
Revenues for the quarter ended Sept 28 were 40% lower than the prior year. As a result IMPX traded
at a five year low of $0.63 per share in December.
Situation Assessment
Financial - The company has experienced a sharp decline in sales and earnings. The stock is down
95% from its peak just a 22 months ago. But - SURPRISE ! This company is not headed for
bankruptcy proceedings. While we would not call its balance sheet "rock solid", IMP is not in a
liquidity crises either. With a current ratio of 1.4 and a book value of $0.41, the company will survive
while its turnaround plan takes hold. Management has been quick to reduce expenses and cut in half
the company's most recent loss ($0.04 per share) on sales that were 38% lower than the previous year
(when the company lost $0.08 per share). Long term debt is minimal and accounts for only 25% of
total capitalization. Even though sales continued to decline in the most recent quarter, it is important to
note that gross margins have widened from only 14% in the quarter ended Dec 28, 1996 to a
respectable 25% for the most recent quarter. At the same time management has slashed overhead by
50% in order to conserve cash. The company is also in the final stages of settling a class action suit
resulting from the stock price decline in 1996. Neither the company, nor any of its officers,
contributed any funds towards the settlement. Resolution of this action will allow company
management to devote all of its energies to the turnaround.
Management:
One key factor we look for before making a turnaround recommendation is a change in management.
Management change is often crucial for a variety of factors including rallying employees to renew their
efforts, letting suppliers know that a serious effort is underway, and in this case - formulating a new
business strategy. IMP appointed James Phillips Ferguson as President and CEO last June. Phil
Ferguson is an experienced turnaround manager with extensive Semiconductor Industry experience.
His early semiconductor career experience included stints at Texas Instruments and Fairchild
Semiconductor. He was founder and CEO of General Microelectronics and has also served as CEO
or COO at QuickLogic, Plus Logic, and Paradigm Technologies. Immediately prior to joining IMP,
Mr. Ferguson provided consulting services to IMP. In order to initiate a new business strategy
(discussed below) the company has made several management additions during the past nine months.
Barry Wiley joined the turnaround team having left Cherry Semiconductor's east coast office where he
was VP of sales and marketing for eleven years. During this time Cherry's sales rose from $10 million
to $100 million. His strong background in specialty analog devices and more recently with power
management products fits well with the company's new strategy. Soon after Barry joined IMP, the
company opened an east coast sales office headed up by Dan Rakosky, another Cherry
Semiconductor veteran. Dan's most recent experience was with Advanced Interconnections where he
was National Sales Manager. Most recently, the company hired Gedaly Levin to head up its newly
announced entry into the power management market. Mr. Gedaly has extensive engineering and design
experience in the power management chip market. Thus the company has put into place an
experienced management team that is capable of effecting its turnaround strategy.
Technology:
IMP has clearly demonstrated that it has the brain power and technological vision to be a market
leader. The company was a pioneer in development of digital cell-based, CMOS, application specific
integrated circuits (ASICs). IMP was also a pioneer in the development of mixed analog and digital
function chips. These chips have the ability to work with both digital and analog signals. While
computers are all based on digital input (ones, and zeros), the real world is best measured with analog
data (infinitely variable over a wide range). Thus these chips have the ability to convert real world
(analog) input to computer (digital) format and allow digital based processors to control real world
devices (such as ovens, speed controls, and power devices such as used in cellular phones).
In 1992 the company introduced the first completely integrated CMOS read-channel integrated circuit
for high performance hard disk drives. The second generation model of this chip was used in
Iomega's wildly successful Zip drive and led to IMP's rapid sales growth in the 1994 - 1996 period.
In 1995 the company introduced EPACT, the world's first Electrically-Programmable Analog Circuit
products. The company's engineers clearly have the smarts to provide "breakthrough" type products.
What has been lacking is a sound business strategy that can move the company into the "big leagues".
Strategy:
IMP's original business strategy was to build custom designed "application specific integrated
circuits" called ASIC's. These chips were produced under contract to various customers who
required specialized chips. The company's sales reached the $50 million level by 1989 at which time
the company perceived another business opportunity in supplying design and production services for
other chip suppliers. By 1993 this contract manufacturing service (foundry services) provided IMP
with 85% of its sales. Profits from these sales allowed the company to develop the special chips for
Iomega's ZIP drive. IMP's fortunes became closely associated with the success of this one product.
The new management team has clearly identified the mistake of trying to develop a continuous supply
of high volume blockbuster products sold to a few large customers. Thus they have shifted focus to
"standard" application chips where the company can use its expertise to add value with innovative
features. The success of this strategy hinges on the ability to provide chips that can replace existing
vendors chips with an item that offers more bells and whistles at a competitive price. While such a
strategy will not provide the instant revenue zip (no pun intended) that a specialized design
"blockbuster" product can provide, the strategy should produce a more predictable and reliable
source of revenues and profits.
We think this strategy can be successful. The market for analog and mixed analog/digital chips is a
dynamic, $20 billion, rapidly growing market with several niches where a specialist can prosper. For
example the company recently announced its entry into the power management business, a $2 billion
market that is growing at 16% annually. It would only require a 2.5% share of this market to double
the company's revenues. Such a small market share can be easily gained through the growth of the
market - without affecting sales of existing vendors. As discussed previously the company has put
together a management team that is well qualified to execute this strategy.
In the meantime, management has acted quickly to reduce overhead, and also encourage remaining
employees to meet the challenge. Staff was reduced to 226 from 450 by the middle of last year. Yet
many remaining employees were given promotions to recognize their efforts during a difficult period.
Management reports that it has reduced the company's break even point to approximately $45 million
in annual sales. And while sales in the company's third fiscal quarter were running at an annual rate of
only $37.6 million, the good news is that non-Iomega business has been increasing. We expect the
rate of increase to accelerate while the decline in sales to Iomega becomes less of a factor. Time will
be required to surpass the company's previous peak in sales ($77 million) and it seems unlikely the
company will again attract the attention it once commanded because of its Iomega connection.
Nonetheless, the company will prosper again and we expect it to surpass its previous peak in sales in
two to three years.
Conclusion
We recommend accumulation of IMPX with a target allocation of 5-7% of your turnaround portfolio
holdings. The company is in transition from a heavy dependence on a few high volume customers to
a broad base of customers and markets. During this transition we expect the stock to bounce around
between $1.00 and $1.25 - until the company starts reporting positive earnings. This may take several
months, so as usual with turnaround stocks, patience is required. It is entirely possible that IMPX
may dip back below $1.00 so be prepared for volatility. While a return to the $20.00 per share level is
unlikely (within our 3-5 year time horizon) we believe $5.00 to $7.00 per share is a realistic 3-5 year
target providing ample reward for the risk. |
