While Conexant Systems Inc. and Broadcom Corp. have declared slowdowns in their businesses, Microsemi Corp.,Orange County’s third-largest chipmaker,isn’t joining the chorus just yet, according to company officials.
“We’re cautiously optimistic,” said Micro-semi Chief Executive Jim Peterson. “We don’t want to come off as saying just because we don’t see anything now, we won’t see something.”
Peterson’s cautious tone is in contrast to more definitive pronouncements from Newport Beach-based Conexant, OC’s largest chip maker, and No. 2 Broadcom of Irvine. In December, Conexant warned that slower demand and excessive inventory would crimp sales and profits. Earlier this month, Broadcom Chief Executive Henry Nicholas said the company wasn’t growing as fast as expected.
While Conexant and Broadcom have seen their shares plunge, Santa Ana-based Microsemi saw its stock hit a 52-week high of around 52 last week. The company counts a market value of about $660 million.
Unlike Broadcom and Conexant, which focus on cable modems, digital set-top boxes and networking gear, Microsemi sells chips to a range of businesses,from handheld device makers to aerospace companies and even the federal government. One analyst said Microsemi’s diversification should spare it the broadside befalling its OC cohorts.
“It’s highly doubtful the company will see a similar slowdown,” said A.G. Edwards analyst Chris Chaney, who recently visited Microsemi. “What’s causing those other guys to slow down is their exposure to the wireless and telecommunications markets. Those were the good places to be at the beginning of 2000, but bad places to be in 2001.”
Microsemi chips go into a broad spectrum of products. The company gets 29% of revenue from military and aerospace uses; 20% from handheld devices; 4% from telecommunications; 13% from computer products; 13% from industrial gear; 8% from medical devices; and 2% from automotive equipment.
Of course, Microsemi’s advantage in hard times can be stifling in others. When Conexant and Broadcom saw big stock run-ups in 1999, Microsemi’s performance was mediocre.
“Fortunately for Microsemi, the company is just entering wireless,” analyst Chaney said. “If wireless were hot right now, I would say they were missing an opportunity. But fortunately for them, wireless isn’t the place to be.”
The reversal of fortune for OC chipmakers began last year. Broadcom shares closed 2000 down nearly 30% in contrast to Microsemi, which posted a 350% gain for the year.
That’s not to suggest Microsemi isn’t vulnerable to a slowdown. A downturn in military and industrial spending combined with a PC sales slowdown could wallop industries that comprise nearly 40% of Microsemi’s revenue.
“The only area where I’m seeing the slowdown is in computer peripherals,” said Peterson.
Peterson said he expects the market for chips that go into computer devices to make up only 10% of Microsemi’s revenue for the current quarter, down three percentage points from the prior quarter.
Even if its computer products business slows, Microsemi’s sales to the defense industry are likely to increase. Peterson said he expects an increase in military spending under President Bush. But with growth in other segments, military and aerospace products still should comprise the same percentage of revenue, Peterson said.
“That’s what balances this wheel,” he said.
Peterson said he expects Microsemi’s business making chips for telecommunication companies,many of which deal with undersea cable,will grow to be about 18% of Microsemi’s revenue in the current quarter, compared to 14% in the prior quarter.
“That’s a high margin, high (average selling price) business,” Peterson said.
But perhaps even more than telecommunications, Microsemi’s sales of chips for personal digital assistants,devices such as the Palm,excite Peterson. While there has been some talk of inventory buildup for handheld makers, Peterson said he is bullish.
“I don’t see much of a slowdown for color PDAs,” he said. “A lot of schools now are requiring students to have PDAs.”
Microsemi’s expansion into new segments and continued growth in military and aerospace is no accident. More than a year ago, Microsemi set out to acquire its way into faster-growing, higher-profit markets. Last year, the company bought commercial and defense chip maker LinFinity Microelectronics Inc. Probably the most important of three recent deals, LinFinity provided Microsemi inroads into the handheld computer market.
“That is our presence in the PDA market, the mobile connectivity market, the telecommunications market,” said Microsemi Chief Financial Officer David Sonksen. “It also enhanced our position in the military market.”
Microsemi also bought semiconductor component maker Narda Microwave in 1999 and the business product group of the Infinesse Corp. last March. Sonksen notes the Infinesse buy gave Microsemi a key foothold in wireless and networking, both lucrative long-term markets.
With the deals, Microsemi now sells only products with a 60% or greater gross profit margin, Sonksen said. Microsemi’s gross margins have improved from 24.8% a year ago to 30.1% in current quarter, he said. n
