Vitesse (VTSS.pk) delivered the required fiscal discipline in Q207. While running a super-tight ship does not come without downsides, at this point I believe the benefits outweigh the drawbacks.
My biggest concerns going into the call were inventory and cash management, and the company executed well in these areas in the face of declining shipments.
Overall, the increased financial discipline within the company is positive trend reversal. In September 2004 Vitesse had net assets (Current assets – All Liabilities) of $38m. In Sep 2005 it was -$51m (reduction mostly acquisition related) and today it stands at –100m. $138m of value flushed in 2 years, not including the $15m or so Tennenbaum is guaranteed either in interest or prepayment penalty.
My remaining concerns are how well Vitesse is aggressively pursuing strategic divestitures that would allow lean resources to be better concentrated in one area. Consolidation is a key theme for us, and the communication semiconductor business is in dire need of it in order to generate incremental shareholder value.
The company indicated financial auditor selection is nearly complete. While this was good, I place greater emphasis on the resolution of shareholder lawsuits, as strategic divestitures cannot (profitably) take place until this is completed. If shareholder litigation was settled and audited results available, this would open up M&A possibilities and allow the value in the company to be unlocked. Re-listing the shares is irrelevant to this outcome, other than providing a wider market opinion of the asset value.
It was evident on the call that Vitesse continues to value Ethernet products, but stressed their role would be more oriented towards the telecom business.
The CEO, Chris Gardner, said this:
We have begun the efforts to focus our development on our core communication business, building on the synergy of the Ethernet and Network divisions.
It isn’t clear exactly what this means, but interpreted literally would indicate the company is de-emphasizing storage. In the face of radically reduced opex, some divestiture is needed in the short term in order to extract maximum value from existing assets.
I assign the following valuations to Vitesse, based on my thesis from last fall. These are my own numbers and are not investment advice. I consider them conservative. You must form your own opinion.
Using these figures, I arrive at a valuation of $1.90-$2.00.
Author is long VTSS