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Investors affirm Vitesse turnaround strategy in sold-out $26.7M offering

By   /   Friday, June 20th, 2014  /   Comments Off

In a little over a year, investors have twice shown confidence in the turnaround of Vitesse Semiconductor Corp. On June 17, the company netted proceeds of $26.7 million by selling 8.6 million shares of common stock.

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In a little over a year, investors have twice shown confidence in the turnaround of Vitesse Semiconductor Corp. On June 17, the company netted proceeds of $26.7 million by selling 8.6 million shares of common stock.

The stock was sold for $3.35, according to securities filings, and the over-allotment option of 1.1 million shares was fully utilized, indicating high demand for the Camarillo-based chipmaker’s shares.

Vitesse shares plummeted 11.3 percent on June 12 when the stock offering was announced, but have since rebounded to $3.50 as of press time on June 19.

Following a stock-options scandal preceded by large acquisitions under previous executives, Vitesse has worked for years to reduce its high debt load and position its technology for the so-called Internet of things.

The company has $32.5 million in debt payments due in October, and the capital raise means it will now be able to pay that off, CEO Chris Gardner told the Business Times. The cash infusion was “really an important milestone to put our debt issues behind us after working at this for years,” Gardner said.

The latest round was Vitesse’s third stock offering in 18 months as it worked to pay off debt. In June 2013, the company closed an offering of 18.7 million shares at a price of $2.15 for gross proceeds of $40.2 million. In December 2012, it announced an offering that netted $17.1 million.

The proceeds from the sales have gone toward paying off debt and growing a new line of business for Vitesse. Before the current offering, the company’s balance sheet had almost equal debt and cash.

The company still had $48.3 million in total debt on its balance sheet as of March 31, securities filings show, but that’s down from about $160 million when Gardner took the helm in 2006. The company had $48.2 million in cash on its balance sheet at the end of March.

“We’re still kind of heads-down, working on breaking through to profitability,” Gardner said. “We are still losing a little bit of money. Right now we are controlling our expenses carefully. We are growing the new portion of our business.”

Vitesse lost $22.1 million last year on $103.7 million in revenue. In 2012, it lost $1.1 million on $119.5 million in revenue.

But the company is betting on a turnaround this year. It has said it expects to see $55 million from new products and expects to reach operating profitability by the end of its current fiscal year.

Its latest technology represents a jump into the so-called Internet of things, which is the concept that many electronic devices in daily life — whether it’s a thermostat, a refrigerator or a car — will be able to talk to one another the same way that computers, phones and tablets do today.

Benchmark Equity Research analyst Gary Mobley said the former executives of the company — who last year pleaded guilty in an options backdating scandal but avoided prison time — had overpaid for acquisitions during the dot-com bubble, driving up Vitesse’s debt load. With the new cash, Vitesse now has resources to move forward and turn the corner, Mobley told the Business Times.

Benchmark was a co-manager of the offering and Mobley has set a $4 price-target for Vitesse’s shares. Vitesse shares have traded in the $2.26 to $4.69 range over the past 52 weeks.

“The company’s product mix is transitioned to be more carrier and Ethernet-related. The company is now at a sort of a break-even,” Mobley said. “They have a little breathing room, in essence.”
Vitesse’s target companies are ones that move around a lot of data over short to medium distances, mostly outside data center environments.

Martin William of Raging Capital Management purchased 1.6 million shares in the recent offering, raising his stake in Vitesse to 14.3 million shares. Securities and Exchange Commission filings show William owned 21.5 percent of Vitesse’s shares in January, before the recent offering.

Gardner, Vitesse’s CEO, said William has participated actively in the offerings and Raging Capital Management’s presence may have encouraged other investors.  “So far our relationships have been very good there,” Gardner said.  “If we continue to execute, I expect them to continue to support us.”

Needham & Co. acted as sole book-running manager and Craig-Hallum Capital Group, the Benchmark Co. and Northland Securities were co-managers for the offering.

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