While Broadcom and Conexant grab headlines, one of Orange County’s oldest chipmakers quietly has put together some big-time growth of its own.
At Irvine-based Microsemi Corp., profits are surging.
That’s yielded big gains on Wall Street.
During the past three years, shares of Microsemi have risen about 650% from the lows of the technology downturn.
They’ve doubled in the past year, giving the chipmaker a market value of nearly $2 billion.
Microsemi has boosted its business the old-fashioned way: slashing costs and going after somewhat stodgy, but lucrative markets.
And it’s done it with the most humble of semiconductors: the analog chip.
Big chipmakers such as Intel Corp. make digital chips, which move blocks of information in packets. Analog chips are an older technology.
“This is not your typical semiconductor company,” said Vernon Essi, an analyst with Janney Montgomery Scott LLC in Boston.
Credit the efforts of Microsemi’s no-nonsense chief executive, James Peterson, who guided the company through the severe downturn earlier this decade.
He closed plants and laid off workers while focusing on research and development to strengthen Microsemi in several markets.
In the quarter ended Jan. 1, Microsemi hit its profit margin targets of 50% a year ahead of schedule, Peterson said. The company’s profit margin was up from 41% a year ago.
Those margins helped the company beat Wall Street’s income estimates by about 9%. Microsemi posted adjusted earnings of $16 million, up more than 80% from a year earlier.
Sales climbed 18% to $82.2 million in the quarter.
“We believe that we can continue to drive revenue growth,” Peterson said.
$130M Acquisition
Meanwhile, the company recently announced a big buy: Bend, Ore.-based Advanced Power Technology Inc., which it plans to buy for about $130 million in cash and stock.
Microsemi counts customers who make products in the defense, aerospace, medical and automotive sectors, as well as makers of laptop computers and liquid crystal display TVs.
Its analog and related chips help regulate and condition electricity in electronics.
Most of its markets are growing but don’t have the huge growth that hot Irvine-based chipmaker Broadcom Corp. is expecting with its chips for Bluetooth and iPods.
Another local chip stock that’s seen big gains in the past year is Newport Beach-based Conexant Systems Inc. It’s been rising mainly as a comeback story.
Wall Street looks for Microsemi to grow largely through making operations more efficient.
“They’re not a top-line growth” company, analyst Essi said.
Microsemi’s biggest market is defense and aerospace. Not exactly sexy stuff, but Microsemi owns the market, and it’s been happy to use its heft to raise prices.
Cornering Defense
Back in the 1990s, the company saw its peers either leave the sector or struggle. Microsemi stuck to defense and aerospace,and even expanded.
“When it wasn’t an attractive business, they were buying failing companies,” said Rob Adams, an analyst with Montgomery & Co. in San Francisco. “They were buying every business around them.”
Microsemi soon saw it had about 60% of the market, Adams said. It also looked like it would take some time for competitors to ramp up when the markets improved.
Seeing this, Microsemi began to do something unusual in the technology sector: demand higher prices. That came at a time when federal defense spending was on the rebound and aerospace was surging.
That’s pushed up profits. The company is talking about more price hikes.
“The company continues to benefit from price increases and healthy satellite and commercial aerospace markets,” said Rick Schafer, an analyst with Toronto-based CIBC World Markets Inc., in a research note.
Peterson also beefed up spending on research and development, which jumped as a percentage of sales from 4.5% in 2000 to 11% by 2002.
That paid off with design wins and growing market share in flat panels, among other things.
Microsemi’s flat-panel chips help regulate the lights for screens and now make up almost 20% of overall sales, Schafer said.
The LCD TV piece, which taps the lucrative consumer electronics market, holds the most promise. It makes up less than 5% of Microsemi’s overall sales. But it is expected to nearly double unit shipments this year.
Microsemi “continues to be a share-taker in the LCD TV market, largely as a result of a strong lineup of new products,” Schafer said.
The chipmaker has contracts with five of the top six LCD makers, according to Schafer.
The Downturn
Five years ago, the company’s sales weren’t growing. Microsemi posted its first decline in sales in eight years in 2001. Peterson started developing a plan to slash costs.
The company was looking to do two things: reduce idle capacity at some of its own plants and tap cheaper manufacturers to make some of its chips.
Three years ago, Microsemi folded its Santa Ana plant, where 380 people worked, into facilities in Garden Grove and Scottsdale. The Santa Ana plant had produced about 20% of the company’s chips.
In early 2004, the company closed its Watertown, Mass., site and moved operations to another plant in Lowell, Mass.
Last spring, the company said it planned to close a plant in Ireland and operations in Colorado.
The Colorado move alone is expected to save the company $9 million to $12 million in the next year or so.
Now, Microsemi is looking for a more additive approach to growth.
In November, the company said it planned to buy Advanced Power, which makes high-powered chips for defense, aerospace and medical device companies. The deal is expected to close by the end of this quarter.
The acquisition gives Microsemi more market share, and analysts see it as a tool to stoke sales and profit growth.
A combination of Microsemi and Advanced Power could produce about $460 million in sales for the year ending Sept. 30, 2007, wrote Shawn Slayton, an analyst with SG Cowen & Co. in San Francisco. Microsemi reported sales of $297 million for the 12 months through last September.
Slayton expects Microsemi to streamline Advanced Power and close at least one of its plants. Some of that work could be shifted to Microsemi’s plants.
Integration Issue
But combining the two companies is a big task. Investors are waiting to see how well Microsemi handles the buy.
“The challenge for them primarily is the acquisition-integration angle,” Essi said. “There are always risk factors involved. This will be a good example where Jim Peterson can show us what he’s very good at.”
There are other risks for the company.
A drop in federal defense spending would crimp its biggest sales base. Also, Microsemi’s power amplifier chips for the next generation of wireless networks called 802.11n isn’t clear yet, Essi said.
Nevertheless, the diversity of the company’s products insulates it from big downturns, Essi said.
“We continue to view (Microsemi) as our top analog pick and a core small-cap holding,” CIBC’s Schafer said.
