Intersil Wants To Be Your Homey
By Tom Byrne
01/02/2002 10:57 AM EST
Intersil (ISIL) has come a long way since being founded by semiconductor pioneer Jean Hoerni in 1967. At that time, Intersil was one of the first analog-chip companies. Today, it still makes analog chips, but thanks to new management it also makes power-generation chips for wireless devices, a hyper-growth industry.
In 1996, Intersil introduced its first-generation PRISM wireless local-area network (WLAN) chipset, which was capable of wireless data communication at speeds of 1 million to 2 million bits per second. Simultaneously, the company also became a leading supplier of power management products, which are used for pagers and other portable devices. By the end of the decade, the company had focused its attention on high-growth communications markets and had grown its intellectual property portfolio to nearly 1,400 patents.
In the beginning of the new decade, Intersil went public in February 2000 at $19, raising $575 million. The stock surged to $45 on its IPO date. Currently, the stock is trading for around $33, which presents a good entry point for a company that has a dominant market share and is well-managed.
Public Buyer
In the two years following Intersil's public offering, the company has consistently improved its balance sheet and technology competencies -- retiring all debt, selling or exiting non-core business and completing several acquisitions and strategic alliances. In May 2000, Intersil moved its company headquarters from Palm Bay, Fla., to Irvine, Calif., and acquired No Wires Needed, a wireless-infrastructure company based in The Netherlands. In June 2000, it sold its assembly and test facilities located in Kuala Lumpur, Malaysia, to ChipPAC, Inc., and in August Intersil invested in Sygate Technologies for the development of roaming Internet Protocol (IP) software for WLANs.
Intersil made a strategic investment in Silicon Wave in September of 2000, for the development an 802.11b/Bluetooth wireless-communications solution. In October 2000 Intersil acquired a leading broadband wireless access (BWA) solutions provider, SiCOM, Inc. of Phoenix, Ariz.
In March 2001, Intersil bought a stake in PowerSmart for the development of smart-battery power management ICs that complement Intersil's existing analog offering. Today's Intersil is leading player in wireless-networking, high-performance analog products and digital integrated circuits. Intersil sells over 4,500 products to more than 28,000 customers worldwide, including Cisco (CSCO), Compaq (CPQ), Dell (DELL), IBM (IBM), Intel (INTC), Lucent (LU), Nortel (NT) and Siemens (SI).
Engineering a Growth Path
All of these deals were the brainchild of Greg Williams, who is president and CEO. Williams joined the company in 1998 (when it was owned by Harris Semiconductor) and he started the renewal of the semiconductor unit, focusing the business on RF, analog and power-core competencies aimed at the communications market.
Williams engineered the sale of the company in 1999 to venture capitalists and its highly successful IPO in 2000. Prior to joining Intersil, Mr. Williams spent 14 years at Motorola Semiconductor, running all the company's major semiconductor groups including analog and discrete products. Prior to Motorola, Greg spent seven years with General Electric (GE) as a field sales and technical-support manager for data-communications services.
Mr. Williams has Intersil focused on wireless networking, which has enormous potential, especially for work and home networks. According to Williams, Intersil has a 60% share of the wireless-network-chip market, shipping over one million chips per quarter, and the company is getting stronger. Intel recently announced that it will use Intersil's chips in its complete line of home networking products. Intersil also signed a deal with Sony (SNE) to provide chips for a wireless TV that can be carried from room to room without losing its cable or satellite connection.
Bringing It All Home
Home networking is a booming market that is still in its infancy. There are 350 million homes in America. About 70 million homes have a computer, and less than 20 million have two computers, according to Chaners InStat. As the computer and the TV merge, and as the computer gains ground as a learning tool and an essential household item, the need for home networks will increase. Cisco, Nokia (NOK) and Intel have all stated that home-networking devices are their fastest-growing products right now.
According to Williams, the price to set up a home network has become very affordable. It costs about $200 for a home-router station, and most electronic retailers will come to your house and set it up for free. The only catch is that you need a broadband modem connection (cable or DSL) to deploy a home network.
Williams is also keen on the convergence of the cell phone, personal digital assistants (PDAs) and handheld computers. Within two years, William sees all three needing more power to run more applications, such as using your cell phone to access the Internet and using your PDA to send email or text messages.
Intersil also knows how to manage its finances and run a tight ship. Intersil has no debt and over $624 million in cash, or $6 per share. It has current ratio (the ratio of total current assets for the most recent quarter divided by total current liabilities for the same period) of five-to-one and a quick ratio of four-to-one. It spends over 20% per year on R&D, which is more than any other semiconductor company, including Intel.
In fact, Intersil's commitment to R&D led to a loss of 3 cents a share in the most recent quarter, which was unusual for Intersil because it had maintained profitability throughout the worse downturn in chip demand in history, which began in March 2000 and is still looking for the bottom. Despite that, Intersil's book-to-bill ratio is still above one, while the industry's book-to-bill ratio has been below one for more than two years. Intersil is not backing down on its R&D spending, but it has improved profit margins by cutting costs in other areas. The company's gross profit margin improved to 51% from 39% in the prior quarter.
According to company guidance, Intersil will increase revenue 3% to 5% in the fourth quarter and earn 11 cents per share. I think the company can earn 60 cents a share in 2002, which makes the stock expensive at 55 times earnings. But the stock is trading for five times sales and four times tangible book value, and it is cash-flow positive to the tune of $30 million for the first nine months of this year. Next year, Intersil should generate positive cash flow of about $100 million, which puts the stock at 34 times cash flow.
The stock is not cheap and it is not a value play. I like the company because of strong management, a solid balance sheet and products that will be in high demand for a long time.
Tom Byrne is the president of Byrne Investment Research in Shrewsbury, NJ |
