A Tech Veteran With a Ton of Cash

04/23/2007 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham, president of Al Frank Asset Management and contributor to the Prudent Speculator TechValue Report, says veteran chip designer Exar is a strong supplier to key markets and sits on a boatload of cash.

Eyeing the gasp-inducing $9.61 per share in cash and near-cash on its balance sheet, one could easily come to the faulty conclusion that Exar Corp. (NASDAQ: EXAR) must have gone public some time during 1999 or 2000, the heyday of tech debuts. In truth, last August it celebrated its 21st year as a NASDAQ-traded stock and its 35th year as a chip maker, making it one of the oldest companies [we have] recommended.  Exar’s balance sheet isn’t the only draw; its focus on smart growth has us believing the company will make a fine long-term performer.

Exar designs chips for the serial communications, networking, and transmission and storage markets.  Exar’s customers include Hewlett-Packard (NYSE: HPQ), Tellabs (NASDAQ: TLAB), and Nokia (NYSE: NOK).

In serial communications, Exar focuses on technologies used to convert parallel data series into serial ones, to alleviate the restrictive cabling requirements of parallel communications. Exar’s devices make their way into a broad range of gear, and the company believes it maintains an approximate 30% to 35% share of the $100 million to $120 million market.

Exar [also] develops and sells high-speed analog, digital, and mixed-signal (both analog and digital) physical-interface and access-control chips. The physical interface includes a transceiver (transmitter and receiver, combined), and is the direct connection to the transmission media, which is generally fiber and copper cabling.

The access-control device [packages data so they] can be understood on the other side of the transmission, performs error checking, adds timing data for synchronization, and can “aggregate” multiple lower-speed data streams into one bigger, faster pipe.

Exar also develops clocks and timing chips, and has designed solutions for storage systems that enable a single connection to access multiple disk drives and, in reverse, to allow multiple systems to access a single disk drive.

In the three quarters ended December 31, 2006, the company generated $52.8 million in revenue, up just under 7% on the year. Inventory rebalancing and a general industry slowdown [hurt] the final quarter of that series, which saw revenue decline 5%. Management was predicting another 5% drop in the current quarter.

Just as the company’s growth streak was ending, and two days after it signed on a new CFO, Exar’s CEO resigned, having been on the job only since September 2004. Our analyst Chris Armbruster saw the new CFO and a few others at a recent investor conference and came away from the presentation feeling sufficiently secure that the company understands where its value lies—the balance sheet and its technological edge—and that they conveyed a sense of urgency [about] filling the executive vacuum.

We’re also confident the company will continue to focus on expanding its presence in fast-growth Ethernet communications and storage systems, potentially by tapping the balance sheet for acquisitions. (The stock traded early Monday at around $13.50—Editor.)

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