INTEGRATED DEVICE TECH INC IDTI
October 05, 2012 - 3:08pm EST by
cobia72
2012 2013
Price: 5.88 EPS $0.59 $0.71
Shares Out. (in M): 146 P/E 9.9x 8.3x
Market Cap (in $M): 856 P/FCF 6.4x 5.3x
Net Debt (in $M): -224 EBIT 98 118
TEV ($): 633 TEV/EBIT 6.4x 5.3x

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  • Semiconductor
  • Turnaround
  • Starboard
  • winner

Description

IDT is a long-tailed semiconductor turnaround with a near-term catalyst to cause appreciation.  Four years ago IDT was a one product category company focused on timing chips.  Timing chips are essential to nearly all types of electronics and IDT was the leader in the market.  Unfortunately for the company at the time, it was about to hit a wall in one of its major sub-categories, timing chips for PC motherboards.  Intel had just announced that it was going to subsume the timing functionality in its own chipset, which would lead to a quick and substantial decline in IDT's revenue from that area.  The company responded by bringing in new management to offset this decline by growing other areas of timing and introducing new non-timing products to the mix.  Over the past four years the company has weathered the decline in PC motherboard timing chips and also introduced a number of exciting new products with first in class / best in class capabilities.  I would argue that the market is not currently recognizing the potential incremental revenue growth enabled by these new products and also not appreciating the hurdle that the company has overcome with the loss of its PC motherboard timing revenue.  In addition to the new products, another positive in the IDT story is the share ownership by Starboard Value Fund and their three members on the company's board of directors.  Starboard has a solid track record in small cap technology stocks of keeping management's focus on profitability and leading to either a positive turnaround in fundamentals or a sale of the company.  i think the CEO has already done a good job over the past four years turning the company around but it cannot hurn to have insurance like Starboard watching out for shareholder interests.
 
Just to go through some of the new products, the company has released two generations of flash controller chips to use in enterprise solid state drives.  Solid state drives are growing quickly now as they have much faster read and write performance than hard disk drives.  The trade off is that they are much more expensive but their costs are declining swiftly with the cost of the underlying flash memory.  IDT's first generation device was a partnership with Micron and is currently shipping in some EMC and Dell devices.  This flash controller has much better performance than any other in the industry and should be a solid performer for the company.  This first generation product is exclusive with Micron so it cannot be sold to other OEMs.  The company's second generation product will be sold to all OEMs and as such represents a larger opportunity for IDT.  Another product category IDT has focused on is the LTE basestation market.  The company has brought together a variety of different chips that all sell into LTE basestations.  Content per basestation has risen from $25 two years ago to $75 today on its way to $100 in two years.  LTE is currently being built out worldwide and presents a solid niche opportunity for IDT.  This is a good example of IDT's strategy which is to focus on niche markets where it can be the #1 player and then incrementally expand by bringing new products to market.
 
The significant overhang the company faces now relates to its pending acquisition of PLX Technology.  The Justice Department has hung up the deal becuase they claim it will create a monopoly in the PCI Express switching market.  The market is waiting for resolution of this situation to better understand the company's 2013 numbers.  To me it is a win / win situation for IDT.  If the deal gets nixed then the company will have a better balance sheet, no dilution, and can make its numbers through organic growth and cost cutting.  If the deal goes through, there are ample opportunities for cost synergies and the company can add its organic growth to the PLX revenue and get to its numbers that way.  Either way I think resolution will be good for the stock price.      
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

I think resolution of the PLX deal will remove a large overhang on the stock.  I also think that solid revenue from new products will reinforce the message of organic growth now resting on the strength of design wins which some people are taking a wait and see approach with.
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