News only gets worse as Vitesse stock price plunges. (Corporate Focus).

INVESTORS - those still in the market, that is - are reportedly looking or its bottom. The chances are none of them though are looking as hard as Vitesse Semiconductor Corp.'s executives.

Stock in the Camarillo chipmaker traded as high as $106 a share in early 2000. But when the company announced on July 17 that it would lay off 200 employees, curtail research and development projects and reconsolidate facilities, shares were trading at $3.35.

The restructuring wasn't the only bad news that day either. Vitesse reported a $735.9 million net loss on $43 million in revenue for its quarter ended June 30. After stripping out one-time charges like $403 million for a reduction in book value of goodwill and $126 million in deferred tax assets, Vitesse reported a loss of $20.6 million. In the same quarter a year earlier, Vitesse reported a net loss of $69.6 million on $60.1 million of revenue.

Then on Aug. 9, the day the company announced it was closing down its network processor development program, its stock closed at $1.50. By Aug. 16, it was trading at $1.28.

"Everybody in the IC (integrated circuit) space has been hit hard by the downturn," said Hans Mosesman, an analyst with Prudential Securities Inc.

Indeed, using the July 17 Vitesse earnings release as a baseline, all of its competitors have had a rough few weeks.

On that day, PMC-Sierra Inc. traded at $10.03, by Aug. 16 it was at $8.15. On July 17, Applied Micro Circuits Corp. sold for $5 a share; on Aug. 16 $5.01. On July 17, Agere Systems Inc. sold for $2.50; by Aug. 16, $ 1,74.

But, Mosesman went on, "Vitesse has been hit particularly hard."

Indeed, matters appear to have only gotten worse.

Mosesman had already downgraded Vitesse to a "hold." Two days after its earnings report, Goldman Sachs and CE Unterberg Towbin both downgraded to "market perform."

In fact, since Sept. 11, 2001, nine analysts have downgraded Vitesse's stock. One, Pacific Growth Equities in January, has upgraded it.

Sandy Harrison, an analyst with Banc of America Securities, said, "There is concern that Vitesse may be taken out of the S&P 500 index," and Mosesman said, "I would expect a lot of companies to join forces in the coming year. Vitesse might be one of them."

A spokeswoman for Vitesse said nobody at her company was available for comment for this story. However, she passed on a statement from Controller Yatin Midy concerning the possibility of withdrawal from the S&P index and a potential acquisition that read, "I deem these as rumors and it's company policy not to confirm or deny rumors."

At the time of its earnings report last month, CEO Lou Tomasetta said that, with the cuts already made, Vitesse's break-even point becomes $60 million in revenue per quarter, something he expects in 2003.

Mosesman said, "For us, we'd say it will probably be more like March '04.

"They're over half a billion (dollars) in debt. That is a balance sheet that is not ideal for a prolonged downturn."

Perhaps adding insult to injury for the entire chip sector are the actions of its best customers. A year and a half ago, there was a sense large telecom firms like Cisco Systems Inc. and Nortel Networks were suffering along with their smaller suppliers. Since then, many have managed to help their own gross profit margins by forcing their suppliers to cut or at least hold down their prices.

For instance, Cisco's gross margin has increased from 52.3 percent in June 2001 to 67.7 percent in June of this year. At the same time, Vitesse's margin has dropped slightly from 49.4 percent in June 2001 to 46.5 percent a year later. Competitor Agere has seen an even more dramatic drop in margin during the same period, from 25.4 percent to 11.3 percent.

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Vitesse Semiconductor Corp.


YEAR (Sept. 30)                 2001     2000

Revenue (millions)            $384.1    $441.7
Cost of Revenue (millions)     201.7     150.8
Operating Expenses (milions)   356.6     230.1
Operating Income (millions)   (174.2)     60.8
Net Income (millions)         (111.9)     27.9
Earnings (Loss) Per Share       ($.60)     $.15

SUMMARY

Business: Semiconductor maker

Headquarters: Camarillo

CEO: Louis R. Tomasetta

Market Cap: $235.2 million

Dividend Yield: NA *

Total Liabilities: $539.0 million

P/E: NA

Long-Term Debt: $485.9 million

* Vitesse does not pay dividends