Strong Demand for Chips Keeps Investors Confident.

VITESSE Semiconductor Corp. was trading at more than $100 a share in early March. Then the bottom dropped out from under tech stocks, and the Camarillo chipmaker saw the value of its shares decline 50 percent in a matter of days.

Were employees worried? Not according to co-founder Ira Deyhimy.

After all, sales have grown by an average of 52 percent per year for the last five years, while earnings per share have increased by an average of 88 percent annually during the same period.

If history is any indication, the company's stock should climb back out of the hole.

"We're pretty sanguine about the volatility of our stock," said Deyhimy, who oversees strategic planning. "It's part and parcel of our industry."

Vitesse, which is French for speed, was founded in 1984 after Deyhimy and Louis Tomasetta, the company's chief executive, left a Rockwell International Corp. research lab in Thousand Oaks to start their own company.

The duo had helped develop semiconductor chips made of gallium arsenide, but Rockwell wasn't interesting in pursuing commercial applications.

The tiny integrated circuits are touchier to work with, but they are two to four times faster than standard silicon chips. That made them ideal, it turns out, for high-speed communication and networking equipment.

"In the '80s, what drove the electronics industry was the PC. That led to thousands of startups," said Deyhimy. "Today, communications is what's driving the electronics industry, and I think it's going to be driving it for the next 20 years."

Vitesse sells its products to a blue-chip roster of telecom and networking companies, including Lucent Technologies Inc., Alcatel Alsthom, Cisco Systems, LM Ericsson and IBM. Because of exploding growth in the industry, its customers can't get enough circuits.

"I think Vitesse is in a very exciting market," said Arun Veerappen, an analyst with Robertson Stephens. "Their key markets are growing by a minimum of 30 percent to 100 percent a year. The market in more ways than one doesn't have the suppliers it needs.

What the company's chip sets do is allow telecom or network providers to take millions of bits of data and jam pack them together for transport on fiber-optic lines. When the information gets to the other end, Vitesse's chips help unpack the data for distribution to telephones, cell phones, cable television, and other systems.

As information carriers try to pack more and more data onto finite fiber-optic systems, demand for Vitesse's products is expected to accelerate.

That rosy outlook may not be apparent from the financial results for the fiscal second quarter ended March 31. Vitesse reported a net loss of $18.6 million (12 cents a share), compared to net income of $15.5 million (9 cents) in the like year-earlier quarter.

But that loss resulted from a one-time charge of $45.6 million related to its March acquisition of Orologic Inc., a company that also makes chip sets that handle data. Vitesse paid about $490 million for the company as part of a stock swap.

Excluding that charge, Vitesse generated net income of $27.0 million (16 cents per share) in the period. Revenues were $189.4 million vs. $127.6 million in the year-earlier quarter.

Orologic isn't the only recent acquisition. In April, Vitesse paid $750 million to acquire Sitera Inc., which makes hardware and software to speed up network processing and traffic online.

Deyhimy said the acquisitions are part of the company's strategy to "morph" into a bigger player. Instead of being strictly a chipmaker, Vitesse is changing its focus to provide entire hardware and software solutions for moving data.

"We're growing in the communications space greater than 60 percent a year, but we can't sustain that growth several years from now unless we move up the food chain," said Deyhimy.

Vitesse was trading at $2 a split-adjusted share in January 1995. Since the March downturn, the stock has already bounced back from a low of $50 to $72.50 on June 14.

Veerappen sees the company continuing to increase sales by 30 to 50 percent per year into the foreseeable future. Meanwhile, he likes the hands-on approach that Tomasetta takes in running the company.

"Once I went to visit him, and I was taken upstairs to the portion of the office he occupies," said Veerappen. "He emerged wearing a lab coat because he had been out on the floor running some tests."

For those and other reasons, Veerappen sees Vitesse as a "buy," especially now that the market has taken the stock down a few pegs.

SUMMARY

Business: Semiconductor manufacturing

Headquarters: Camarillo

CEO: Louis Tomasetta

Market Cap: $10.5 billion Dividend Yield: N/A*

Total Liabilities: $40.1 million PIE: 252

Long-Term Debt: $720,000