Vitesse Ventures Out

Electronic News, May 8, 2000 by Carol Haber

Vitesse Corp., Camarillo, Calif., is neck-deep in the sizzling network processing arena along with the likes of Intel Corp. And like Intel and so many others, it has decided to take the venture capital route to broaden its horizons and shore up the market positioning of the technologies it owns.

Last week Vitesse somewhat tentatively announced the formation of a venture fund armed with "$5 million or less" for strategic minority investments in start-ups focused on cutting-edge components or systems in the communications field. It is the company's first formal venture effort and "it may or may not be renewed on a yearly basis," said Ira Deyhimy, a co-founder of the company and vice president, business development. "We'll see how it goes."

Two investments have already been made; others are currently under discussion.

The tentativeness of the venture effort is in sharp contrast to a string of aggressive high-profile acquisitions by the company in recent months in the hotly contested network processing arena: XaQti Corp. in May 1999, Orologic Inc. in March 2000, and Sitera Inc. in April of this year.

The company expects initial venture investments to be in domestic start-ups but foreign transactions are not precluded. "We're looking for companies in our general market space. We're involved in fiber optic communications in the datacom and telecom markets. They could be components, systems, or software developers. We're also not precluding the wireless area because in an indirect way that plays into our business," said Deyhimy.

Vitesse is undergoing twin transitions; the first toward a major emphasis on CMOS technology-based product lines from the more specialized and pricey gallium arsenide orientation, and the second toward the hot communications markets from a major stake in automatic test equipment (ATE) sales. These transitions are pressuring Vitesse's performance in the near term, according to Charlie Glavin, an analyst with Credit Suisse First Boston.

In mid-April, he lowered his share rating on Vitesse to a buy from a strong buy; reduced earnings estimates, and spoke of limited upside for the next four quarters. Still, Vitesse is red-hot in the markets it wants to be in, he acknowledged. Communications sales for the second fiscal quarter of 2000 hit $88 million, up 65 percent from the year-ago quarter and up 17 percent sequentially.

But there are signs of pressure.

"As we expected, Vitesse's second-quarter 2000 results met our 16 cents earnings per share and $100 million revenue estimates. Sequential revenue growth of 12 percent was led by 20 percent quarter-over-quarter growth in datacom. However, lower revenue estimates for ATE and higher share count from the Orologic purchase forced us to trim our fiscal year 2000 EPS estimates by a penny to 66 cents and for fiscal year 2001 to 97 cents from $1.03." He added that a penny of EPS had come from issuance of convertibles.

Also, "While Vitesse remains a franchise communications IC player with excellent technology targeting fast-growing markets, we are lowering our rating to a buy. We believe the company's transition to a more CMOS-based strategy, as well as its large share count and ATE visibility, severely limits potential upside over the next four quarters."

He continued: "Revenue of $100 million slightly beat our forecast, increasing 50 percent over last year and 12 percent sequentially. More importantly, the quality of that revenue upside was actually better than we expected. All of the upside came from surprisingly strong performance in the communications group, particularly the datacom business, which grew 20 percent over last quarter as well as high-speed optical transmission ICs, which grew 17 percent sequentially."

But the communications upside came at the expense of ATE.

"Vitesse continued to gear its focus away from its legacy ATE business that resulted in a more pronounced rate of decline," Glavin said. "While we normally would be happy to see a gradual decline in ATE-related business as a percentage of revenue over time, we had estimated more or less flat ATE revenues, based on prior management guidance. Instead, that segment was down 11 percent sequentially to $12 million as Schlumberger and its other traditional customers in the group have been purchasing lower speed IC components. For instance, Schlumberger sales comprised only 5 percent of revenue this quarter when it traditionally has been a 15 percent customer. We now estimate that this segment will continue its decline to 10 percent of total revenue in fiscal year 2000 and less than 5 percent in fiscal year 2001 as Vitesse continues to focus on the high-speed communications IC products."