I am still not sure why this stock is so overvalued. 6 percent of rev on R&D seems low and the slowing of the segments they sell into can not be good. If the margins are that good, other hurting semiconductor companies will bound to end the market segment. Power management does not have an great barriers to entry that I know of. For MSCC it is a case of being in a segment no one else wanted to be in at the time given that other segments were growing faster.
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Internet & Technology
Friday, July 6, 2001
Power Chips Spark Turnaround
Small firm Microsemi was fading fast until it targeted cell phone, PDA field
By James DeTar
Investor's Business Daily
Microsemi Corp. (MSCC) is a rare bird. It’s a semiconductor maker that continues to fly high even while rivals get their wings clipped.
Microsemi shares are trading near their all-time high, and they’ve outperformed 98% of stocks over the last year. Amid an industry slump, the company’s sales in its second fiscal quarter rose 10% year over year to $63.1 million. Earnings doubled to 32 cents a share from 16 cents.
What makes the story more dramatic is that the chipmaker was hurting two years ago, while many competitors were thriving. Sales in 1999 had stalled and profit was down sharply.
“This is a great transition story,” said Rob Adams, analyst for CIBC Oppenheimer in New York. “Two years ago, it was a company that was struggling. Its gross margins were at 25%. Now they are at 30%, and over the next two years they target 50%.”
Most of the chip industry can only dream about such numbers. Chipmakers are cutting prices as they chase a shrinking pool of customers.
Chip sales in May were down 20.1% from the year-ago period, the Semiconductor Industry Association said this week. It was the seventh month in a row that sales were down sequentially.
Chips Are Down
The SIA expects things to get worse before they get better. If a recovery comes, it won’t be until the end of the year, SIA officials say.
So how is Microsemi bucking the trend? By trying new things. The company, which once focused on low-margin diodes for the military, now makes power-management chips for cell phones and hand-held computers.
“Microsemi has done well in attacking new markets,” Adams said.
As portable devices — and their batteries — shrink down, they need to use power wisely. Microsemi’s products help the gadgets do just that.
The growth of Palm computers and other personal digital assistants, or PDAs, is fueling Microsemi’s rise. The company’s sales in that market are up 80% in the past three months.
Customers include Hewlett-Packard Co. (HWP) and Intel Corp. (INTC), which plans to roll out a PDA called the Webtablet in August.
Carmakers are another of Microsemi’s targets. They use the company’s chips in their in-dashboard computers. Microsemi is one of the few companies that meets the strict specifications for chips that go into cars.
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“We’re in every in-dashboard auto PC,” said Chief Executive James Peterson. “That includes Audi, BMW, Mercedes and the rest.”
Peterson says the company could grow faster were it not for the market’s plunge. “We’re getting the same haircut as the rest of the industry,” Peterson said.
Even so, Microsemi’s far better off than it was a couple of years ago.
From the day it opened its doors in 1960 until the mid-1990s, Microsemi saw slow, steady growth. It made its name in diodes, which control the flow of electricity within computers.
Diodes are the glue that lets computers work. Profit margins on the devices were low, but they provided a steady source of sales.
Then, when military spending slowed in the 1990s, profit fell.
The company’s earnings fell from 80 cents a share in 1996 to 67 cents in 1999. That’s when Philip Frey Jr., then Microsemi’s chief executive, kicked off a big change in strategy.
Microsemi began buying other companies. It acquired Linfinity Microelectronics Inc. for $24 million in April 1999. That let Microsemi enter the market for analog chips and mixed-signal processors.
Communications device makers use analog chips to record and send waves, such as light or sound. Mixed-signal devices convert these analog signals into digital data.
Analog and mixed-signal chips are common in cell phones, stereos, TVs and the like. They’re sometimes referred to as real world chips vs. pure digital chips.
The Linfinity purchase was the base for a whole new generation of Microsemi products. And Microsemi got an added bonus — Linfinity’s management.
One of them was Peterson, at the time Linfinity’s president. After the merger, he led the creation of Microsemi’s new power chip products. In November, Microsemi named him president and chief executive.
Light, Sound, Power
Today, Microsemi makes chips in three categories: light, sound and power. Its power devices are the hottest sellers. And not just for cell phones and PDAs — health care equipment firms are snapping them up.
Microsemi’s chips are finding their way into a host of medical gear, says Chief Financial Officer Dave Sonksen.
“In addition to heart pacers and defibrillators, we will also move into insulin pumps and a whole host of products in the human body,” Sonksen said.
But Microsemi’s chips for medical gear, as well as those for auto in-dashboard PCs, cell phones and PDAs, are a lot more complex than diodes. So they require more research and development.
The company currently spends just 6% of its revenue on research. That will gradually increase to 10% to 12% over the next few years, Sonksen says.
Microsemi’s also boosting overseas sales. When it mostly made devices for the military, 60% of sales were in the U.S. Later this decade, most revenue will come from international markets, Sonksen says.
Microsemi is still making acquisitions. On June 12, it announced two purchases. It’s buying Compensated Devices Inc. of Melrose, Mass., for $11.5 million and New England Semiconductor Corp. of Lawrence, Mass., for $9.1 million. Both companies make chips for the military and space markets.
Adams says he thinks Microsemi will easily ride out the current chip slump. But he also thinks the company has a ways to go before its transformation is complete.
He expects the company to get a shot in the arm when new, sophisticated cell phones take off in the next couple of years. “When the next generation of cell phones ramps in 2002 or 2003, this company will be a high-flier,” he said.
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