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VTSS Investor Forum

valuations have compressed

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Periodically, and with no routine method, I write down the Price/sales ratio of a number of the participants in the industry. They have notably compressed over the past 2 months.

The first number is the P/S ratio for June 8 of this year and the second one is the ratio as of end of day today, August 16. the third number is the percent decrease in the ratio. All of the ratios have come down. Since 6/8/11 the NASDAQ is down 5.68% and the DOW industrials is down 5.33%.

all of these companies have reported earnings so there has been time to reappraise the companies. AMCC which gave very bad guidance for the coming 6 months has been hit the hardest.

At any rate there was a time when a P/S ratio of 3 or 4 was prevalent. Not in todays environment.


BRCM . . . .2.64 . . . .2.60. . . (-1.51%)
Qcom .. . .7.32 . . . .6.24. . . (-14.7%)
MRVL . . . .2.65 . . . 2.23 . . . (-15.86%)
LSI . . . . .1.67 . . .1.59 . . . (-4.79%)
NVDA . . . .3.09 . . . 2.17 . . . (-29.78%)

AMCC . . . .2.46 . . . .1.52. . .(-38.21%)
MSPD . . . . 1.50 . . . .1.18. . . (-21.33%)
VTSS . . . 0.68 . . . . 0.56 . . .(-17.65%)

Posted by dlog - 14 years ago

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24

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Thanks, dlog!

Posted by G - 14 years ago

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Monday 8/22, VTSS at $3.14 on 38,000 shares ($/157 per share pre reverse split). There are no buyers for this thing anywhere. Down $.10 on basically no volume at all.

I have to say that the company is in much better shape than at anytime in the past 5 years. Certainly it is better financial condition. No debt due until 2014. Break even point is very low now compared to any time in the past 5 years.

they need to give someone a reason to buy stock. and that reason is an increasing revenue stream. If it comes I have to believe we may see the price firm up.

Posted by dlog - 14 years ago

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Well, you’ve got to hand it to the guys; a new 50-week low today. Fifteen cents per share. No volume, no buyers, no interest. VTSS means leprosy. VTSS means ‘nearly worthless’. The stock has lost over 40% of its value since relisting on March 2nd. We came within one cent (pre-split) of our post-Lehman Bros Pink Sheet low, 51 weeks ago.

Thoughts about the last earnings CC:

1) Cash up $1.5M and they paid off another $1.5M on the Whitebox loan. That’s very positive.
2) If you’re a BOD interested in continuing ops, you don’t pay off $1.5M if you think the future is iffy. Look at what most companies are doing these days – hoarding cash. Why? Because they know the corporate credit markets will dry up in another economic downturn. Whitebox has no leverage to FORCE the BOD to do this, so they must think it’s a good idea to either cut down the interest payments, or get WB out of the way. Out of the way of what? A sale?
3) Inventory Turns. The new CFO inadvertently let the cat out of the bag. They are playing games with us. You value inventory at COST, not SALES value. Turns are equal to ANNUAL COGS / Avg Inv. It is NOT equal to SALES / Avg Inv. Right now turns are at about “2”, which sucks (~$50M / $25M). He says their target for 5 turns is $21M, which implies they are not using COGS in the numerator like everyone else in the business world. Meet the new gang, same as the old gang.
4) $31M in product sales is the worst in years.
5) $35-$37M next quarter sucks as well. This is their Q4, supposedly every company’s big quarter.
6) On the other hand, if they’ve eliminated all but about $1-$2M of non-core product sales, then $31M and $36M is about flat/right for just the core business. No growth, but otherwise about right.
7) 25% new product by next Q4 would be about $45M, plus or minus. It would be the news the market is waiting for, if it ever comes.

As always, I’m trying to explain fifteen cents a share. Today you could have bought the entire company for less than 1X sales, including paying off all the debt. VTSS’ competitors, while not doing much better business-wise, are still trading at 2X to 3X sales, with debt to pay off in addition. What gives? It’s as if we’re back to the market pricing VTSS as if it’s going to go bankrupt, but not any of its competitors.

Which doesn’t make much sense, so I’m back to the motives of the bondholders. We’re running out of options, so accounting for what’s remaining, it appears that the market is pricing in one of two scenarios:

A) The bondholders may be willing to sell this company for $3 a share, far less than it might otherwise be worth, but since they’ve already covered themselves with the 3-for-1 dilution, maybe they don’t care and might just dump the company to be rid of the risk.

B) After what a major holder did early this year, dumped 10% of the company at market in about 20 minutes and driving down the value by 20%, maybe the market is leery of another bondholder doing the same. Maybe they figure the only safe place is under the $0.18 dilution conversion value. We may not get any buyers not just until 2014 when the bonds convert, but maybe not for another half decade until the current BOD gets replaced.

Given the hiring of a 60-year old CFO with M&A experience, I’m thinking option “A”; they are looking to sell VTSS at yard sale pricing.

Posted by LMS - 14 years ago

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LMS . . . What company would buy this turd; more importantly, what would be their reason . . . all those nifty design wins . . . which have amounted to exactly what?

Posted by G - 14 years ago

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G:

I hate to say this but I know a company that would and probably will buy VTSS and the probability that they will buy VTSS increases the more poorly VTSS performs. It's Whitebox (along with the rest of the bond holders). And the way they will buy it is by wiping out all of the stockholders when VTSS can't meet its next bond due date (which I think is 2014 or something like that). And the current stockholders will get zilch.

The way to avoid this is start reporting some decent numbers.

Posted by dlog - 14 years ago

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G, What I am trying to get at is why VTSS in particular? To ask why would anyone buy VTSS is to also ask why would anyone buy one of VTSS' competitors. They are all experiencing the same problems in the market, all of them are seeing revenue declines, and most do not have their processes, margins, inventories, core/non-core businesses and debt cleaned up like VTSS does. Except for some of the larger players who are in other, more diverse markets/products/lines of business, most of these small players all look about the same on paper, and they all look a lot like VTSS. So if VTSS is trading at 0.5X sales, why aren't MSPD, LSI and AMCC?

Also, I think that come 2014 the only debt that will be owed is the $15M to WB, the other $50M is all convertable to stock. So if it came to forking over the entire company, or ponying up $15M in cash between them, I think the new owners would clearly come up with the money to pay off WB (which, as I mentioned, might be one of the strategies they are employing right now).

Also, also, who the hell is selling at $0.16? And why? There just was not that much bought at $0.12 and $0.14 three years ago and a year ago, so none of these sellers are making any money. So, if they are not taking their meager profit, and its too early for tax loss selling, the only motivation is that you think it's going even lower, to $2.50 or to $2.00 or less. Which is sort of the same recognition that there are no buyers, and therefore potentially no economic bottom to this. Which is back to my question - WTF is going on?

Posted by LMS - 14 years ago

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WTF is going on is that this company is mostly owned by hedge fund bondholders. When their investors want their money back (as many are moving to cash in this market, or into gold), they have to sell, regardless of the price. There aren't many buyers, so they sell some every day. That is what I think is going on.

Posted by sharpinvestments - 14 years ago

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LMS:

Do you remember the covenants of the bond deal? Is there another one of those put options in 2014? Or does the bond come due in 2014 or what? I can't remember (and I am too lazy to look it up now).

Posted by dlog - 14 years ago

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Hi LMS,

First, I hope you did not read too much in my last post . . . I was not having any issues with your post; they have always been some of the best on the board and I do greatly appreciate you taking the time and to think through all of the fine points and share them with us.

But let's face it, trying to figure out how VTSS operates or why the stock trades the way it does has taken all of us to the cleaners, even after fine minds like yours, and a few others here, have put this thing under an SEM and looked at it every which way from Sunday.

I have, a long time ago, stopped making any comparision of VTSS to the likes of AMCC, MSPD, etc., as this has gotten us all into even deeper shit. I also rarely look at the price of VTSS stock more than once a week because what is the point? And I surely do not bother to read any of their PR fluff pieces, unless of course I am on the throne getting ready to wipe and I have forgotten to but TP.

Kind regards,

G

Posted by G - 14 years ago

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I was just looking at some notes. Anyone remember the "We will grow at 20% long term" line? We haven't heard that in a long time.

9 month revenue for VTSS is down 10% versus last year and if Gardner hits the high end of guidance, $38 million, total revenue for the fiscal year 2011 will be $148 million. Last year revenue was $166 million. This makes 3 of the last 4 years VTSS has shown negative revenue progressions. I would look up more years but the previous years revenue numbers "can't be relied upon."

But we have lots of design wins and our break-even point is down!! And we are spending $50 million per year on Research and Development which, after 3 years, $150 million total, will give us, if we hit targets, $40 million in new revenue next year. (A number that is highly suspect.)

If VTSS doesn't hit net profitability, and I mean profitability after interest expense and taxes, by March 2012 it is time for Gardner to go. It is that simple. But that is clearly up to the hedgies who evidently are very pleased with these kinds of numbers.

Posted by dlog - 14 years ago

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Dlog, R&D are getting paid not for Revenue from their designs but busy work. Until their R&D dept. is paid for results that result in big revenue wins, the company is going to continue its downtrend. Try firing a few of the R&D folks and watch them change what they are designing. Any business can't sustain this investment in R&D vs. Revenue and expect to survive. They have blamed Sales for the lack of revenue and marketing, but never their R&D people. If they truly would design a valuable product that captured a real need out there, the product would sell, believe me.

The problem is that the CEO was an engineer and still thinks like one instead of a business man. He should be taken out behind the shed and spanked till he gets it! I would be more than happy to volunteer to help in that pursuit, given what I financially lost on this stock.

Posted by Grandpubha - 14 years ago

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Grand:



I have to agree with you that we may be strapped with an engineer CEO which is great when you have a product that is so compelling all you have to do is produce it and customers beat down the door to buy it. That is clearly not the case here.

I am not sure we will see any meaningful growth from VTSS in the next 5 years. Already we have Gardner talking about this great new product that will give us $7 million in new revenue in 2012 and 13-15 million in 2013. What this tells me is this is the best product they have and it is expected to yield $7 million in new revenue. VTSS needs $40-50 million to hit its target of 25% of revenue coming from new products. Nothing in the recent (5 year) history would provide any confidence this will happen.

but the attraction of the stock has been it is undervalued vis-a vis other industry participants. Lets say VTSS makes it to $45 million in sales per quarter. They start to report real earnings etc. That would be $180 million in annual sales, still growth of less than 10%. But if the stock assumes a somewhat normal Price per sales ratio it still looks great from here. Let's assume a 2.0 ratio. that would be a market cap of $360 divided by 25 million shares outstanding is $14.40 per share. Even if sales are $170 million and the ratio is 1.5 that still gives a stock price of $10 per share. We can crank these numbers endlessly and if one grants the assumption that VTSS will someday get parity on its P/S ratio the stock looks cheap (even if you use 37 million shares of full dilution you still end up with a share price north of $7).

I just don't know how long VTSS will be viewed by the stock market as the dog of the industry although I am pretty sure it won't be until they at least stop the revenue line from heading south. Clearly it still has debt problems but all that goes away if the stock moves up dramatically.

they do need to reduce the R&D expense. It is sitting there as the elephant in the room.

Posted by dlog - 14 years ago

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Dlog, all I do is coach CEO's in how to get their businesses to profitability or their Executive teams to collaborate on major vital projects. These problems are not difficult to resolve, because the CEO's who hire me are open and receptive to changing what they were doing before I got there. Those situations turn into big wins for them, which reinforces the changes they made to become successful. This CEO is stuck and he has no clue because he thinks all he must do is continue what he has done and is doing currently and he will get a different result. That is the definition of insanity!

Posted by Grandpubha - 14 years ago

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Grand, I suggested you contact CRG to offer your services last year, have you tried this approach? CRG fields calls from shareholders regularly; please call and see what develops...

Peace

Posted by GARIF - 14 years ago

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Friends, Isn't R&D an investment for growth? if so wouldn't reduction in this vital area bring more uncertainty to the future of Vitesse?? specially when she lacks the cash to purchase needed technology(companies).
I have posed this question to grand before, to no avail, Dlog could you share a response please??

Thanks

Posted by GARIF - 14 years ago

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Garif:

My point is business model question. The comment that R&D is an investment in the future is a tautology, it can't be argued with. It assumes that the money spent will create a better future. My comment is a business model comment. A business cannot survive long-term when it spends $150 million to generate $50 million in revenue. there is simply no way the numbers work out. There is only one way to continue on a course like this and that is to get money from the capital markets (stock or bonds) and then proceed to spend another $150 million for the next $50 million of revenue. At some point it stops. You simply run out of dummies who will give you more money.

I am all for productive product R&D spending. I would challenge anyone to make the case the $50 million VTSS has spent each year for the past 5 years has generated anything near $250 million in new revenue. Last quarter revenue from products developed in the last 3 years, $150 million spent to develop them, generated "less than one million dollars." Call them up and ask them.

If you are going to develop products you might want to find someone who can actually identify a product someone might buy. And then fill that need. Right now it is apparent VTSS lacks that insight.

Actually I think VTSS realized this. They are saying they will reduce the B/E point even further and they have less and less they can cut from SG&A. Any material reduction in cost is going to have to impact R&D even if they want to protect it.

My question is how long do you give a guy and how much money do you let him spend before you say enough is enough. We can't fund non-productive R&D forever.

Posted by dlog - 14 years ago

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Amen, Dlog. I couldn't say it better myself.

I have had a standing offer to CRG to come down and help him and he has not taken me up on the offer. He has my number, email address and I am very public as I post on my Blog almost daily about the stock market and politics. It is most likely that the moment he finally believes he could use some help, it will probably be too late.

I remember a number of years ago I was asked by a very well known senior partner of Kleiner Perkins if I would go help the CEO of one of the companies in their portfolio, right the company. I remember going to meet the CEO and the senior people reporting to this CEO. I asked a lot of questions on that first day, questions they weren't used to hearing and being asked. After the day was over, I went back to Kleiner Perkins and said that in my opinion, it was too late and that the company had no more than several weeks before it went under and ran out of cash. It was being mismanaged and was out of control. Several weeks to a month later, they had to shut the company down.

In the end, what amazed me most was that the CEO was still in denial about what the problems were that created the collapse. I still wonder if he ever got it. Accountability is a rare commodity in the final throws of failure. I'm afraid that is where CRG is today and will be there tomorrow as well.

Posted by Grandpubha - 14 years ago

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OH MY GOD! dlog is "ventanaexploration" -

Posted by Satbob - 14 years ago

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Dlog,

Thanks for the clarification! In the Q2 CC CRG confirmed a sad truth in his response to Bob Sells; "Enterprise is a little different. the product cycles tent to be quicker, both up and down, and that is where we've seen some decline on, as I mentioned, our SME/SMB stuff. those products are definitely older than they should have been. We should have gotten to a product cycle a few years ago, but as you pointed out we have been going through some challenges. We managed to integrate both the Enterprise and Carrier together and attack a much larger market with the same amount of R&D. That took us a little longer, and I think as a result we have suffered through some declines there, or maybe a different way to say it is, we've suffered through not being able to grow that segment as a result of that."

Before 2010 Vitesse could have invented a Rocket that could reach Mars in a month!! possible buyers still would have kept their distance. They've brought in Perna who is considered by many a great pick, to move products.

Now we wait for the much awaited results!!!!!!!!!

peace

Posted by GARIF - 14 years ago

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Hi Garif,

Thanks for pointing out MC Gardner's response to whatever a Bob Sell's is (That MC stands for "Micro Cap", since that is what Gardner did to the share price)....as I think that ties in perfectly with Mr. Grand's comment about being in denial...... no one forced Mr. Micro Cap to embark (and hide from sharholders the true difficulties and open ended cost) on going back to spend tens of millions of $$$'s on restating finanicals......that ended up providing nothing of value as far as getting relisted was concerned.

Though considering the the lousy return Vitesse has gotten on all the R&D money over the last few years, a person could say (though I ain't that person) at least Vitesse spread the waste around.

This stock also most looks like a buy here.....just think if Andrew Redleaf can push himself away from the buffet long enough to get control of the BOD and appoint Perna as CEO.....this stock would be at least $8 in a week after that.

Posted by altrfan - 14 years ago

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The highly educated can be the most inflexible, Specially, Specially, those IVY leaguers! they were born as senior citizens, bless their hearts!!! but lets give some credit, the man is making adjustments...

welcome back altarfan, buy time indeed! dive back in...

Peace

Posted by GARIF - 14 years ago

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"This stock also most looks like a buy here . . . "

Alt, have you lost your mind?

Posted by G - 14 years ago

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G, my friend Alt reminds me of a Korean young lady who took an AP Spanish class along with my daughter in HS; The young lady attained the second best grade in the class(A+), yet she spoke very little Spanish. The "A" allowed the young lady to have the highest GPA in the school thus securing her acceptance to her school of choice(CAL).

As my daughter shared with me about the energy of her class mates in regards to her Korean friend, I shared with her that losing ourselves in the Aesthetics of things is dragging us down as a country...........

Peace

Posted by GARIF - 14 years ago

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Hi Garif,

FYI, we are not friends. In addtion, my parents (nor anyone they knew) would not have tolerated teachers or a school system that allowed people who were unable to master a subject to receive a passing grade.....much less an "A"

If I cared enough about your kid, which I don't, I would feel sorry for your daughter that you would tolerate her going to such a crap school....but don't worry, she will learn those lessons in a much harder fashion later in life.

Peace right back at ya porkchop.

I will add that having been exposed (like most people who live/lived in the great state of California) to the varied Asian cultures, I don't think those Korean parents would be too pleased either. Dem folks be very much like the Pollacks, Bohunks, Middle Easterners, and other immigrants to the East Coast and Great Midwest who put a very high standard on academics for the younguns.....

Posted by altrfan - 14 years ago | Updated 14 years ago

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