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SEC Subpoenas Nu Horizons

Yesterday the SEC issued a subpoena to Nu Horizons (NUHC) for documents related to business with Vitesse Semiconductor ( The motive for the subpoena is not public but I suspect it is to understand the mechanics of the transactions between the two companies that enabled Vitesse to engage in bad financial behavior.

I examined the relationship between the two companies in the following articles:

I’m still negative on Nu Horizons. My personal opinion is that they derive a significant portion of their gross margin from attractive deals placed with suppliers like Vitesse who use distribution as a buffer customer. This buffer allows suppliers to make end of quarter shipments and meet revenue targets. Distributors demand rich margins from suppliers to provide this service.

If this practice were to end, it would have a compelling impact on the financials of all distributors, not just Nu Horizons. It will be interesting to see the outcome of the SEC investigation and if it impacts the accounting behavior of semiconductor suppliers.

My opinion is that Vitesse has rationalized it’s relationship with Nu Horizons. Qualitative information discussed during the Vitesse FQ107 conference call about inventory levels at distributors and revenue linearity supports this conclusion.

Nu Horizons, after 6 straight quarters of revenue and operating income growth, broke the streak in their quarter ending November 30, 2006. Vitesse was the second largest supplier for Nu Horizons FY 2006 (Year End Feb 2006).

Author has a Nu Horizons short position and owns Vitesse Semiconductor equity.


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  1. >If this practice were to end, it would have a compelling impact on the >financials of all distributors, not just Nu Horizons.

    It seems that this will have a big impact on semis too. The business is so cyclic, even with distis acting as buffers help smooth the effects of bursty demand.

    If somehow channel stuffing is made illegal, semi companies will lose value as their earnings variation increases quarter to quarter (as indeed will be the case will all companies that use distributors in cyclic markets). One big question is can some of this value be recaptured as payments to distis are decreased.

    Posted by m@ | April 19, 2007, 4:00 PM
  2. M@ – you hit on a very key point I’ve already written in a post for later publication.

    The semiconductor cycle will be made more volatile, particularly for small cap semis. This absolutely will mean lower multiples taken by itself. I favor it regardless at it better reflects organic demand, which I can predict, rather than synthetic activity, which I cannot.

    The upside is these companies will recover several points of gross margin, and more importantly, run their business in a sensible manner.

    I would be naive to believe that changing the rules here would change the nature of companies behavior. When there is a will there is a way.

    Posted by Andrew Schmitt | April 20, 2007, 5:56 PM
  3. Similar trend in EMS sector (Flex etc..). It seems the outsoucing has changed the behavior of technology companies in general. The accumulation of inventory at FLEX and its likes can be blamed for the want of interest in Semi companies. It will be interesting to see how long NASDQ rally can be sustained without the participation of Semi or Communication groups.

    Posted by yf | April 22, 2007, 10:05 AM