A Chip Maker That’s Spreading Its Wings

10/22/2007 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham of the Prudent Speculator TechValue Report finds a semiconductor company that's reaching beyond PCs to a growing array of electronic devices.   

Since [we last wrote about it] nearly a year ago, Integrated Device Technology (NASDAQ: IDTI) has significantly boosted the top line, while reining in costs and approaching positive net income.

Growth in the computing chip business had been robust, though the pace of progress in that unit looks to slow in the near term. Meanwhile, difficult year-over-year comparisons have led to relatively weak performance in consumer electronics and communications sales.

Despite these short-term setbacks, we expect IDTI to drive long-term growth through technological leadership and product-line expansion. And with its solid balance sheet and appealing valuation, IDTI remains a fine addition to well diversified, long-term-oriented equity portfolios.

IDTI is a "bits and pieces" chip maker that's been gaining size as its silicon supports an increasing number of key functions within an expanding array of electronic devices. This expansion has come as the company has shifted to markets in which growth potential and technology requirements are higher. The transition to higher-value chip markets has had a correspondingly positive impact on gross margins, as has the transition of a greater portion of production to wafer foundries.

Today, IDTI emphasizes markets for chips that support and manage communications within and between devices sold in several segments of the broader tech industry, and breaks out results into the following three business segments: networking (31.4% of fiscal 2007 revenue), timing and memory interface (50.2%), and standard products and other (18.4%).

When we last highlighted the company, we discussed Intel's (NASDAQ: INTC) emphasis on advanced memory buffers (AMB), which expands traffic flow between memory boards and the memory controller in its server platforms. IDTI made the most of the transition, which unfortunately has just about maxed out, as has IDTI's ability to increase its market share in that segment.

Chip sales are expected to double over the next 12 to 18 months, [but] overall growth in computing may fall to a single-digit pace. And gains in the communications segment have stalled as large orders for China's next-generation wireless infrastructure in the fiscal fourth quarter failed to follow through.

But sequential top-line growth is expected to continue in the current quarter, albeit at a slowish flat to 5% rate, driven by the computing and consumer segments.

While the company continues to fall prey to margin compression, we feel upbeat about management's recent efforts to contain costs. Too, IDTI's continued investment in research and development, approximately 23% of first-quarter fiscal 2008 (ending March 31st) revenue, points to management's commitment to technology, which [could] allow the company to outpace the market and increase its share of the pie.

That the company repurchased approximately $100 million of its shares and retains approximately $75 million under the current buyback program supports a long-term positive view of the stock. IDTI's cash-strong balance sheet ($1.56 per share) and 14x forward earnings multiple maintain our interest.  (The stock closed below $14 Friday-Editor.)

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