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Vitesse Outlook Worsens – Even More

Craig Matsumoto
7/28/2006

The story at struggling Vitesse Semiconductor Corp. (Nasdaq: VTSS) got more grim yesterday, as the new management team gave an overview that opened questions about the company's cashflow, inventory, and previously reported revenues.

On the plus side, the new team said it's struck down some of the previous financial processes that led to some of the problems, and that it's putting priority on getting to cashflow breakeven status.

The stock -- already well down from its 52-week high of $3.79 -- fell 32 cents (25 percent) to 96 cents by midday.

It was the first official conference call for Vitesse's new senior management, which took over after three top execs were fired in the company's stock-options scandal. (See Vitesse Execs Get the Axe.) But yesterday's call -- held in lieu of a formal earnings announcement -- revealed Vitesse has problems going well beyond stock options.

For starters, Vitesse's cash situation is troubling. The company ended June with $29.2 million in cash despite getting $52 million from Tennenbaum Capital Partners in June.

This implies Vitesse ate through $26 million from May 15 to June 30 -- after having consumed a like amount between December and May, analyst Tim Kellis of Stanford Financial Group wrote in a note this morning. He estimates Vitesse's current cash burn at $15 million per quarter, "which basically gives them two quarters until they have to return to the trough."

Not included in those figures is $4.2 million that's gone to "professional costs," the fees being paid to institutions helping clear up Vitesse's financial morass, officials noted on the call.

Vitesse is not cashflow breakeven yet. The company said it plans to bolster its position by turning some inventory into cash, and by selling some "excess assets," including an unused wafer fab in Colorado Springs, Colo. -- but that won't fix everything. "In our opinion, the company is not taking the aggressive steps necessary to save it from a cash crunch," Kellis wrote.

Aside from cash, CFO Shawn Hassel implied that Vitesse's high inventories were making revenues look bigger than they should have.

While Vitesse didn't report revenues or net income for the June quarter, Hassel gave out "net consumption" figures. Net consumption isn't part of generally accepted accounting principles, but it gives an indication of a company's sales, as it measures pure end-customer demand while leaving out anything happening with inventory or the distribution channel.

For Vitesse's first quarter, which ended in December, net consumption was $47.6 million -- smaller than the $53 million in revenues reported for the quarter.

Net consumption was up to $50.7 million for the third quarter, which ended in June, but that's well off the $62.3 million in revenues that analysts had predicted, according to Reuters Research .

Table 1: Vitesse: Revenues vs. Net Consumption ($M)

Revenues Net Consumption
Q1 (Dec. '05) 53.0 (reported) 47.6
Q2 (Mar. '06) 58.0 (est.) 49.7
Q3 (June '06) 62.3 (est.) 50.7
Source: Reuters Research (analyst estimates of revenues, as of July 27), Vitesse Semiconductor Corp. (net consumption figures, reported Q1 revenues)




CEO Chris Gardner said Vitesse has put the kibosh on some questionable practices, such as "shipping large amounts to distributors and negotiating incentives for distributors to remit cash on those shipments prior to quarter end." Vitesse's previously stated cash holdings were probably higher than reality thanks to such practices, he said.

Vitesse hasn't yet announced any reorganization or any cuts in product lines, which troubles some, given the company is in a fight to regain profitability. "We ask ourselves, why the company hasn't seriously evaluated its product focus and decided where it needed to scale back," Kellis wrote.

Asked on the conference call about the possibility of cutting product lines, Gardner indicated Vitesse is still mulling over the issue. "We've already spent quite a bit of time looking at the problem of where should we be putting our money," he said. "We'll be making more firm decisions here within the next quarter or so."

— Craig Matsumoto, Senior Editor, Light Reading

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Pete Baldwin
Pete Baldwin
12/5/2012 | 3:47:00 AM
re: Vitesse Outlook Worsens – Even More
I do have to say -- Vitesse's management team did well by holding this call and pledging to rekindle regular communication with the analyst community. And it looks like they're being diligent about scrubbing up the sales/financial practices to make things squeaky clean.

But man, unless I misinterpreted the call, this is continuing to get deeper (hence the headline). We'd heard rumors about inventory and revenue-recognition "creativity," and it's looking like some of that might be true. Anyone have another interpretation?
Jakewk
Jakewk
12/5/2012 | 3:46:48 AM
re: Vitesse Outlook Worsens – Even More
Were these problems specific to Vitesse or are other companies using the same techniques?
optoslob
optoslob
12/5/2012 | 3:45:59 AM
re: Vitesse Outlook Worsens – Even More
Craig,
Just ask anyone in the business and they'll tell you that VTSS is a VERY creative company, this is absolutely nothing new.

If they have the books open all the way back to 2000 than there is lots of room for corrections. Trouble is it is all irrelevant because they'll file Ch11 long before all this unravels. IMHO

CH11 is probably the best solution, allows fresh start accounting with a sensible capital structure.

optoslob



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