Is Chipmaker Making Move? Integrated Device Expects Turnaround From Losses
Date: 4/15/99
Author: James DeTar
When Integrated Device Technology Inc. reports quarterly results Tuesday,
the chipmaker could be profitable for the first time in a year.
Chief Executive Len Perham says the Santa Clara, Calif.-based company will
break even or make money for the fourth fiscal quarter ended March 31.
''We'll show profit this quarter. Or at least we think we'll show a profit.
We've been predicting that to the investment community,'' Perham said. He
also says the company likely will have increased sales for the second
consecutive quarter.
Integrated Device has endured wrenching change as it struggles to make
money in a difficult market. In addition to a string of losses, the company's
stock dropped to just above 4 last fall. On Wednesday, it closed at 6 7/16.
Part of the problem is that Integrated Device has been a company in search
of an identity. Like rivals National Semiconductor Corp. and Texas
Instruments Inc., Integrated Device has a broad product line. But that's
changing.
Integrated Device has reshaped itself into a communications chip company,
Perham says. This will allow it to expand along with the booming Internet and
corporate networking markets.
The company has faced more than three years of recession in the
semiconductor industry and one year of extensive company restructuring. But
Integrated Device may be at the beginning of a sustainable business
recovery, says James Barlage, analyst at Lehman Bros. in New York.
''We believe that a slight profit could be reported in the recently completed
fourth quarter of fiscal 1999 after reporting losses in the previous three
quarters,'' Barlage said in an April 5 report.
Among Integrated Device's new products is the Switchstar, a chipset
designed to bring low-cost fast networking into the home. Integrated Device
has sampled the new Switchstar to about 40 customers so far, Perham says.
Priced at $200, Switchstar is expected to help bring networking into the
home when it comes to market.
Due to products such as Switchstar, communications chips grew from 36% of
Integrated Device's sales to 65% between 1995 and 1998.
At the same time, Integrated Device moved away from areas where it
previously was strong, such as PC memory chips. Prices on these have
plummeted, falling 80% during one 12-month period from 1997 to 1998.
In 1995, memory chips were 46% of Integrated Device's sales. By 1998, the
devices' revenue share shrank to less than 25%. Perham says the company is
developing newer memories that will be useful in networks.
In January, Integrated Device completed the sale of its San Jose, Calif.,
manufacturing facility to Cadence Design Systems Inc. for an undisclosed
sum. That sale reduced Integrated Device's operating costs by roughly $100
million a year, Perham says. Along with the facility, the company shed some
300 jobs.
''The building is sold and it's in escrow. And we should complete the sale in
the month of April or the first week of May,'' Perham said.
The company also shifted its research and development, previously done in
San Jose, to a main manufacturing facility in Hillsboro, Ore. Sale of the San
Jose site wasn't a magic bullet, though. Perham says the company still must
boost sales to fill factory space.
''The company has a great deal of excess capacity. We need to increase sales
in every way we can,'' Perham said.
Integrated Device always has had quarterly meetings with regional sales
managers. Now, in a bid to boost sales, it's having monthly meetings.
In order to be a communications- chip player, Integrated Device has gone on
a buying binge. During the fiscal 1995 to 1998 period, the company spent
more than $700 million for property, plants and equipment. Integrated
Device announced a bid for Quality Semiconductor Inc. , also based in Santa
Clara, on Nov. 2.
At its April 30 annual meeting, Integrated Device's shareholders will vote on
the proposed buyout. Under the stock- swap agreement, Quality's
shareholders would get 0.6875 share of Integrated Device stock for each
share of Quality stock.
Perham says if shareholders vote to buy Quality, a maker of networking and
other types of chips, that could boost Integrated Device's total revenue by
up to $55 million in the next fiscal year.
''I think in the first week of May the merger will be complete,'' Perham said.
''And it should be a very profitable stream of revenue because the products
and portfolio and customers of Quality are very synergistic with Integrated
Device.''
In addition, Integrated Device is shifting its microprocessor strategy. The
company's Centaur unit makes an Intel-compatible processor called the
WinChip. Perham says Integrated Device has seen the writing on the wall.
Integrated Device doesn't want to stand alone against Intel, Advanced Micro
Devices Inc., National and others in that arena. So Integrated Device is
looking for a partner for future versions.
''We made the decision probably six months ago that because the business is
so aggressive, and the players are so huge, we need to find partners going
forward. So we've been very active in looking at partners that could share in
product definition,'' he said.
Although the company isn't fully out of the woods, Perham is fairly bullish.
''We have more than $200 million in the bank. The company is in no danger
and we look like we're going to have a good year, a cash-generating year,'' he
said.
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