Semiconductor Wrap: More Than Just Profits –

For months after the market slammed Internet and software stocks, and even after a slew of negative second half analyst reports on industry giants like Motorola, chip and circuit board stocks managed to keep investor interest. But, as the market continues to wreak havoc, many companies in the once indefatigable sector have been unable to outrun its wrath.

“Front-end bookings in January declined sharply, dropping 21% from December, and there is little doubt that we have entered a cyclical industry downturn,” warned Adam, Harkness & Hill analyst Frederick Wolf in a Feb. 21 FirstCall/Thomson Financial semiconductor report.

In a slap to current conventional wisdom?s face, VC-backed chip companies boasting growth but not earnings have largely made better showings than their profitable counterparts in the public markets.

A look at 10 VC-backed chip companies from The IPO Reporter database showed five of them performing above offering through midday trading on Feb. 22, while the 10 as a group were 1.50% above offering. Of those 10, five posted losses last year but four of them were above offering. And as for the five that posted earnings, four were trading below offering.

It is mostly a young group, with five of the companies founded in 1997, and three others in 1995.

The leading performer is Centillium Communications (NNM:CTLM), which makes chips that provide solutions for three broadband related areas — DSL, voice over packet, and home networking. Apparently, investors have been willing to bet on the explosive growth potential of the broadband market, as the company posted $46 million in losses last year off $56.5 million in revenue. Founded in 1997, Centillium received its fourth and final infusion of venture capital in May 1999 — some $38 million from six investors, including Goldman, Sachs & Co., Lehman Brothers, and U.S. Venture Partners. Centillium was trading at $31.06 yesterday afternoon, more than 63% above its May 24, 2000, offering price of $19.

The class of 1997 also produced the second-best performer of the group. Pixelworks Inc. (NNM: PXLW) designs and develops complete system-on-a-chip solutions that enable the visual display of broadband content on computers and other electronic devices. Pixel offered the most discounted offering of the group, at $10 on May 19, and while its $17.06 Thursday afternoon price was 70.6% above offering, it was roughly half of what the company was trading after its lockup expiration in November. Pixel does, however, seem to be nearing profitability, posting losses of only $2.79 million off $34.47 million in revenue for the first nine months of 2000. In a move it hopes will slick that path, Pixel announced a $7.5 million investment on Jan. 30 in Toronto-based Jaldi Semiconductor Corp., a privately held fabless semiconductor start-up developing reconfigurable Digital Signal Processing (DSP) technology. The deal gives Pixel marketing rights to Jaldi’s future products and a cross-license covering certain technologies.

Punished for Profits?

Conversely, Silicon Laboratories (NNM:SLAB) was well below its offering price despite posting profits of $14.02 million last year. Ditto for ChipPac (NNM:CHPC) and Therma-Wave Inc. (NNM:TWAV), which respectively posted more than $9.35 million and $30.4 million in earnings for the nine months of last year ending Sep. 30 and Dec. 31, respectively.

Silicon Labs, a developer of integrated circuits for communications products that took in $13.7 million over two rounds in 1997 and 1998 from hometown backer Austin Ventures and five other investors, appears to be the victim of an overly aggressive offering price of $31. Through Thursday afternoon, the company was down 43.94%. Despite a more moderate pricing of $12, ChipPac, which only went through one buyout/acquisition stage round of $170 million in August 1999, was trading at just under $4, more than 67% down.

Therma-Wave, which manufactures thermal wave imaging devices for semiconductor manufacturing and testing, was at $11.69 as of Thursday afternoon, trading at nearly half of its Feb. 4, 2000 offering price of $20. The company took in moderate funding from Bain Capital (which was also in on the ChipPac round) and Sutter Hill Ventures in 1997.

Despite negative earnings, two of three chip and semiconductor-related companies founded in 1995 and that went public last year were trading above offering. Despite more than $71.46 million in losses through the first nine months of last year, Transmeta Corp.?s (NNM:TMTA) reputation as a potential challenger to behemoth Intel Inc. (NNM:INTL) has kept its share price well above offering since the company?s Nov. 4 IPO. On Thursday afternoon, the company was trading at $31.25, nearly 49% above its $21 offer price. The maker of VLSI chips for web-enabled mobile devices has extra clout with an illustrious array of at least 15 venture backers that include America Online Inc., Sony Corp., and Walden International Investment.

Numerical Technologies (NNM:NMTC), which develops software that helps create smaller and faster semiconductor production equipment, and which posted $34.57 million in losses last year, was 37.07% above its $15 offer price through midday trading Thursday. The company went through four rounds of funding, the last coming on Jan. 1, 2000 for $40.5 million. Goldman Sachs, Index Venture Management, Mohr, Davidow Ventures and one undisclosed venture firm were the backers.

A company that has not been able to escape its losses is Mobility Electronics Inc. (NNM:MOBE), which had one $12.5 million round in 1999, courtesy of J&W Seligman & Co. Mobility makes docking stations powered by its patent pending PCI Split Bridge technology, which is created by splitting a standard PCI-PCI bridge chip. The technology allows the extension of a computer PCI bus to a remote device up to 15 feet away with minimum performance degradation. Posting more than $10.62 million in losses last year, it was trading at an even $3 – that?s 75% below offering through Thursday afternoon.

The two oldest companies in the year 2000 chip IPO group were both profitable. Founded in 1978, DDi Corp. (NNM:DDIC) followed through on one buyout/acquisition round in 1997 totaling $62.40, with Bain Capital, Celerity Partners, and Chase Manhattan Capital Corp. in support. A provider of circuit boards and other electronic components that enjoyed earnings of $13.2 million last year, Ddi was up more than 64% from its April 11 offering price of $14.

Despite the backdrop provided to it by the California energy crisis, as well as nearly $4 million in earnings last year, Advanced Power Technology (NNM:APTI), which makes power conversion semiconductors used in motors, lighting, and other industrial applications slipped to around $14 on Thursday, shy of its $15 offering price. From 1984 through 1993, the company did 12 separate financing rounds, but only for a combined $37.67 million. Investors included First Chicago Ventures, Orien Ventures, The Vista Group, and at least nine others.

Given that the chip sector has done relatively well compared with most other sectors during this market drubbing, analysts say many such companies have become overly optimistic. “What is troubling to us is that we keep hearing semiconductor vendors say that they are counting on higher than normal turns business to make their Q1 guidance. We simply do not believe this is going to happen,” wrote Lehman Brothers analyst Daniel Niles in a recent FirstCall/Thomson Financial report.

The 20.6% drop in front-end bookings of semiconductor products in January — normally a solid month — marks the worst monthly decline for January in 10 years. Concurrently, analysts report, back-end demand in January marks the sixth consecutive month that bookings have declined. On the bright side, front-end bookings are expected to revive in the second half of this year, although the revival for back-end bookings is expected to take somewhat longer. In all, orders have declined some 37% over three months.

Semiconductor and chip companies are coming off a strong year, one that saw the industry post a record $204 billion in worldwide sales, according to the San Jose-based Semiconductor Industry Association (SIA). But in a Feb. 5 press release, the SIA said its forecast for 2001 calls for 22% year-over-year growth, “however, due to the inventory overhang going into 2001, it is unlikely we will achieve that projection.”

Omar Sacirbey can be contacted at