One of Microsemi Corp.’s many recent acquisitions is proving timely for the Irvine-based chipmaker in deals involving new airport security body scanners.
Microsemi, which makes chips for aerospace, defense and industrial uses, said last week it landed its first contract for chips that go into body scanners.
The technology, called millimeter wave chips, came from Microsemi’s $28 million buy of the defense unit of San Jose’s Endwave Corp. last year.
Endwave’s defense electronics and security business also makes chips that run radar fences, sensors and other security devices.
Wall Street responded with a flurry of research notes speculating on the value of the deal—and the potential for Microsemi to win more of them.
“With a renewed focus by the U.S. and other governments abroad after the Christmas scare in Detroit, governments are looking to upgrade scanning technology,” said Patrick Wang, an analyst at Wedbush Morgan Securities LLC in New York. “We see Microsemi’s millimeter wave technology as a compelling opportunity to drive incremental revenue growth over the next few years as airports and other public areas bulk up on improved and more secure screening systems.”
Airport body scanners are a new market for Microsemi with the potential to drive sales, analysts said.
“Hundreds (of scanners) are planned for installment in U.S. airports this year and hundreds more could be planned for next year,” said Tore Svanberg, an analyst at Thomas Weisel Partners Group Inc. in San Francisco. “We believe revenue opportunities for the company could total in the tens of millions over the next 12 to 18 months, which translates to potential top-line growth of 5% to 10%.”
Microsemi sees yearly sales of around $450 million.
The Endwave unit buy was one of many acquisitions Microsemi has made in the past few years. The company has been a consolidator in a niche known as high-reliability chips, which go into devices where failure can be extremely costly.
Microsemi is marketing the scanning technology as SecureWare, which allows the detection of potentially dangerous items hidden under clothing.
The product is designed to detect metal and non-metallic items.
“Providers of such systems have reported substantial increases in demand since the Christmas day incident, when a passenger allegedly tried to ignite powdered explosives he had hidden under his clothing,” the company said.
The company said it is ready to meet demand.
“We are prepared to meet the extraordinary demand for whole body imaging systems and other solutions that provide the higher level of safety now required at so many airports and other public facilities,” Chief Executive Jim Peterson said.
Microsemi’s initial order is estimated to be for chips for around 500 scanners with a value of around $10 million, according to Oppenheimer & Co. analyst Rick Schafer.
The order most likely was from New York-based L-3 Communications Holdings Inc., one of the few government-approved makers of the body scanners. L-3 was known to be a customer of Endwave before Microsemi came into the picture.
Sales of chips for body scanners are expected to boost profits, according to analysts.
Wedbush analyst Wang estimates that for roughly every $10 million added to Microsemi’s top line, the company will see its bottom line grow by about $4 million.
“Given the high-margin nature of security and defense deals, we see an opportunity to add high-quality revenue,” Wang said in a note to clients.
He has an “outperform” rating on the chipmaker and a $20 per share price target. The stock was trading at around $17 per share late last week with a market value of $1.4 billion.
More orders likely are in the pipeline, analyst Schafer said.
“Additional orders appear likely and sustainable as the U.S. government pushes for greater airport security,” he said in a research note. “With nearly 500 airports and 2,000-plus security lines in the U.S. alone, the opportunity is significant.”
More details on the deal are set to be announced when Microsemi reports results for the December quarter next week.
Analysts, on average, are expecting the chipmaker to post profits of $213 million, down 28% from the same period a year earlier on sales of $112 million, down 14% from a year earlier.
