Re VRST: by popular request, here's the analysis offered by "WorldFinanceNet" (Note that it's actually been priced at 7, below the expected range of 8-10)......
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Verisity (VRST)
3.3 million shares offered, price-range $8-$10. Underwriter: Robertson Stephens
Type of business: Communication chip design verification testing software
As communications chips become increasingly complex and sophisticated, the process of validating and testing new designs has become a major challenge. Between 50%-70% of the cost of new chip development is consumed by functional verification testing. In fact, more engineers are used at this stage than in the design of the chip itself. As a result, a market for functional verification software tools is emerging. However, it is still a nascent industry. Estimated at $98 million in ’99, it is expected to grow to $800 million in ’04.
Verisity has developed a proprietary set of software based functional verification tools, that help automate the process of testing chip designs.
Started in 1/96, and boosted by an 11/99 acquisition, early reception has been generally positive and is accelerating. The company reports a blue chip customer list which includes: Cisco, Conexant Systems, Ericsson, Fujitsu, Hewlett-Packard, Intel, LSI Logic, ARM holdings, and MIPS Technology. Typical of a young company, revenues are concentrated. Three customers account for 23.6% of the business and are led by Cisco (10.6%). There is also a considerable international component (35.9%) to the business.
Despite the firm’s promise there are several reservations.
· Despite the US operations, this is really an Israeli firm. Both the R&D and the management are based in Israel. Consequently, performance has been distorted by Israeli government R&D and tax subsidies. The firm is also vulnerable to political risk interruption.
· Performance has been somewhat attractive. However, it does not yet reflect the severe correction in this sector during 1Q’01. The exposure to Cisco is particularly troubling in the near term, since Cisco is lowering its outlook.
· Despite the blue chip customer list this is still a relatively small firm in a nascent and relatively limited industry. Mid-term opportunities for growth are unclear.
Performance has been distinguished by strong revenue (both top line and deferred) growth in late ’00. Operating margins are still negative although there is progress. However, the infrastructure appears disproportionate to the near to mid-term revenue dynamics, despite the government subsidies. The firm has not yet proven the transition from research to product marketing.
· Between ’98-’99 revenues increased by 62.2% to $11.5 million, with an 83.4% gross margin and a $7.4 million (-64.6%) operating loss.
· Between ’99-’00 revenues increased by 87.3% to $21.5 million, with an 88.4% gross margin and a $4.6 million (-21.5%) operating loss. Some of the ’00 growth was boosted by an 11/99 acquisition. However, the real revenues are understated. During this period the firm added an additional $14.7 million in deferred revenues, reaching a total of $20 million.
· Both top line and deferred revenues surged in 4Q’00, when the top line added $7.5 million (35% of ’00 revenues) and deferred revenues increased by $6.8 million.
Valuations in this sector are volatile and uncertain, reflecting the limited number of direct comparables and the newness of the industry. It is also vulnerable to the swings of the semiconductor industry. For comparative purposes we highlight competitors Synopsys, which recently traded in the upper half of its 52-week range, and Cadence Design, which recently traded near the midpoint. Some recent, loosely related IPOs may add further perspective.
· QuickLogic was a $67 million deal offered on 10/15/99. Offered at $10, it closed at $15.13 for a 51.3% first day. It recently traded at $6.25, off 58.7% in the aftermarket and under the offering.
· InSilicon was a $42 million deal offered on 3/22/00. Offered at $12, it closed at $21.56 for a 79.7% first day. It recently traded at $4.94, off 77.1% in the aftermarket and under the offering.
· Symplicity was a $34.4 million deal offered on 10/12/00. Offered at $8, it closed at $11.38 for a 42.3% first day. It recently traded at $12.69, adding 11.5% in the aftermarket but in the lower half of its trading range.
Reflecting the uncertainty in this sector, pre-offering demand is reported to be moderate (Street Scoop: 2 stars).
Conclusion: There are several reservations about this offering. First, the size of the industry is very uncertain and early estimates are very subdued. Consequently, sources of long term growth are not obvious. Secondly, the company’s ’00 performance is somewhat promising, but horribly dated. Given the collapse of the chip and networking sectors during 1Q’01, current demand is very uncertain. The exposure to Cisco, normally a plus, merely illustrates this risk. Thirdly, the firm has yet to match the infrastructure and the product demand, despite Israeli government subsidies. So there is a question about the viability of the business structure. On the other hand, this is a small (3.3 million shares) and relatively low priced offering. Depending on market conditions at the offering, the terms may attract day traders and spark a more volatile price during early trading. Any discounting, will definitely boost activity. For a similar firm in this position we might anticipate a moderate initial reception (e.g., 10%-20%) followed by volatility and erosion. |
