Vitesse Semiconductor Corporation

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Vitesse Semiconductor Corporation

741 Calle Plano
Camarillo, California 93012
U.S.A.
Telephone: (805) 388-3700
Fax: (805) 389-7188
Web site: http://www.vitesse.com

Public Company
Incorporated: 1984 as Vitesse Electronics Corporation
Employees: 650
Sales: $281.5 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: VTSS
NAIC: 334413 Semiconductor and Related Device Manufacturing

Vitesse Semiconductor Corporation is an integrated circuit, or chip, manufacturer with a difference: its ICs are made from gallium arsenide (GaAs) instead of silicon and can handle transmissions up to 10 Gb/s (gigabits per second). The performance advantages of GaAs over silicon are based on the fact that electrons travel five to six times faster in GaAs than in silicon. Vitesse pioneered the volume manufacturing of GaAs and eventually began to produce competitively priced ICs that offered superior performance over silicon devices. After a decade of unprofitability, Vitesse became profitable in 1995 with rapidly growing demand from the telecommunications and data communications industries for more bandwidth and faster speeds.

Struggling with New Technology: 1984–87

The company was established in 1984 in Camarillo, California, as Vitesse Electronics Corporation, by a group of engineers from Rockwell International Corporation who had been working on making digital circuits with a new material called gallium arsenide. They formed Vitesse to develop cost-effective digital gallium arsenide integrated circuits (ICs) for the high-performance electronics market.

Initial funding of $30 million came from Norton Company, a manufacturer based in Worcester, Massachusetts. Approximately $18 million went toward developing GaAs technology, and $12 million to design the architecture for a superminicomputer. The computer project was eventually shelved, as the company lost its focus by trying to do too much.

From 1984 to 1988 Vitesse trailed its competitors in getting contracts for GaAs products. The military fueled the development of GaAs technology by awarding large multimillion-dollar contracts. The military favored GaAs’s ability to withstand heavy doses of radiation, absorb high temperatures, and operate at high speeds while using a small amount of power. GaAs products were considered ideal for military applications such as missiles, aircraft, satellites, and microwave communications. Most of the military’ s contracts went to Vitesse’s three competitors—GigaBit Logic, Harris Microwave, and TriQuint Semiconductor—as well as to several aerospace companies.

In 1985 Vitesse engineers developed a plan to pursue a commercial market for GaAs outside of aerospace and defense. Louis Tomasetta, one of Vitesse’s cofounders and a former director of gallium arsenide development at Rockwell International, told Electronic Business, “We looked at the market and realized we had to compete in the silicon world.” GaAs was not only a faster material than silicon, but GaAs chips also required less power to operate.

Vitesse realized its first revenues in June 1986. Its chips were about six months late in getting to market, and analysts charged that the company was booking orders it could not deliver. Vitesse needed more capital to continue its work, but Norton was unable and unwilling to provide it. Other venture capitalists were uninterested in Vitesse’s computer project, but the GaAs technology attracted one important investor, Pierre Lamond.

Pursuing GaAs Technology Under New Ownership: 1987–91

Lamond was a venture capitalist with Sequoia Capital and a founder of National Semiconductor Corporation. With Lamond’s backing, Sequoia became the lead investor in a $10 million secondary round of financing in early 1987, and the company was reorganized to focus on developing GaAs chip technology. Lamond became chairman of the board of Vitesse in February 1987, when the company was incorporated as Vitesse Semiconductor Corporation, a successor to Vitesse Electronics Corporation. Louis Tomasetta was named president and CEO. Tomasetta had been in charge of integrated circuits at Vitesse Electronics and was a Ph.D. graduate of the Massachusetts Institute of Technology.

From 1987 on, Vitesse concentrated on the commercial market for GaAs chips to support LSI (Large Scale Integrated) and, later, VSLI (Very Large Scale Integrated) technologies. The company’s goal was to have 70 percent of its customers in industrial and computer markets, with the remainder in military and aerospace.

Vitesse developed the first 2.5 Gb/s (gigabit per second) telecommunications 1C in 1987. By March 1988 it had a current order backlog of $1 million and annual revenues of about $3 million. The company was shipping high-speed static RAMs and high-density gate arrays.

As of early 1988 there were about 200 companies in Europe, Japan, and the United States buying GaAs for use in future hardware products. If computer system engineers could design gallium arsenide chips with TTL (transistor-transistor logic) memory circuits and ECL (emitter-coupled logic) gate arrays onto an integrated circuit board, the resulting computer system would operate three times faster than its silicon-based counterpart. The computer would be smaller, use less power, and run cooler.

By early 1988 Vitesse was building about 1,000 GaAs wafers a month in its 45,000-square-foot Camarillo fabrication facility, and could build 5,000 a month on demand. A breakthrough in building GaAs chips came when Vitesse stopped using gold, which was causing temperature instability when the chip’s density was increased, and reverted to traditional methods used in building silicon-based semiconductors. This enabled Vitesse to build denser GaAs and to achieve yields high enough to meet demand.

In 1990 Vitesse was the only company in the United States using GaAs to build digital VLSI circuits. It was the leading supplier of 1.0 Gb/s physical layer ICs. The company had 125 employees, about three-quarters of them engineers. The value of the firm’s stock had tripled in the past three years, and stock options were used to lure talented engineers.

In May 1990 Vitesse signed a technology agreement with Advanced Micro Devices (AMD) to jointly develop high-speed data communication ICs using gallium arsenide technology. At the time, gallium arsenide chips typically cost five times more than silicon chips. It was already foreseen that gallium arsenide chips would be used in fiber-optic communication systems and possibly in ISDNs (integrated services digital networks). Both cost and technology were preventing more widespread use of gallium arsenide ICs in commercial applications. At the time, the telecommunications and data communications industry was migrating toward gigabit-speed connections between computers, which would require the faster speeds of gallium arsenide technology.

Continuing Losses: 1991–94

For its fiscal year ending September 30, 1991, Vitesse reported a loss of $2.9 million on sales of $23.7 million. The firm had yet to show a profit for a complete fiscal year, although it was marginally profitable for three quarters of fiscal 1991, following a large loss in the first quarter.

Vitesse completed its initial public offering in December 1991 and was listed on the NASDAQ market. Some 3.2 million shares were offered at $9 each. By February 1992 the stock was trading at $18 per share and had reached a high of $21. For the first quarter ending December 31, 1991, the company reported a profit of $268,000 on revenues of $8 million. Analysts were recommending the stock, expecting Vitesse to ride the GaAs wave in the 1990s and noting its strong management team. Having achieved critical mass, the company was seen as ready to enter a stage of rapid growth, with revenues and earnings expected to increase markedly in the years following the IPO.

The company’s prospectus revealed that it was encountering inventory control problems and low yields as it attempted to move into volume production of its GaAs circuits. Low yields, in which too many of the manufactured chips are defective, were blamed on the large number of different products the firm manufactured in limited volume as well as the relative immaturity of the firm’s H-GaAs (high integration digital gallium arsenide) process technology. In order for the firm to succeed, substantial improvements in yields would be required, as the low yields were causing shipment delays.

In 1992 Vitesse accelerated its hiring and was aggressively seeking at least a dozen new electronics engineers. The additional personnel were needed to help in the firm’s expansion into the workstation and microcomputer markets and to sustain its growth. It marked a shift for Vitesse from development to mainstream manufacturing. The firm had about 280 employees at the time.

Company Perspectives:

The name Vitesse, French for speed, expresses what our company epitomizes: the pursuit of ever faster integrated circuits for high-bandwidth, high-performance communications systems. Today, virtually every long distance call passes, at some point, through a Vitesse 1C. Most of the world’s telecom systems use Vitesse 2.5 Gb/s chips. We play a critical role in the superhighway; we lead the industry in gigabit datacom and 10 Gb/s telecom ICs. Perhaps, most important, we are cost effective. We believe advancing the technology isn’t meaningful unless it’s feasible.

Although Vitesse wanted to supply its chips to the telecommunications market, the market was not ready yet; therefore, the company focused on the supercomputer market. One supercomputer customer, Convex, accounted for 47 percent of Vitesse’s revenues in fiscal 1992. However, the supercomputer industry was collapsing. For 1993, Vitesse’s revenues declined 38 percent to $17.7 million, and the company lost $19 million. The losses continued in 1994, and the company’s stock nosedived to about one-third of its value since the IPO. The firm cut back and laid off about 30 percent of its staff, while remaining employees took a ten percent pay cut for six months.

Market niches began to open for Vitesse around 1994. Vitesse had built a demonstration chip for a new telecommunications standard called SONET, which was being pushed by Bellcore, the research consortium of the Regional Bell Operating Companies (RBOCs). As the telecommunications market evolved, it required greater bandwidth (i.e., speed), which Vitesse’s GaAs technology could deliver. By the end of 1994, telecommunications companies were building products to the SONET standard. From the beginning of 1995, Vitesse’s revenues began to grow, and by the end of 1998 the telecommunications sector accounted for 51 percent of the company’s revenue, with data communications accounting for 23 percent and automated test equipment (ATE) contributing 26 percent.

Explosion in Telecommunications and Data Communications: 1995–99

After reporting a net loss of $4 million for fiscal 1994, revenues picked up in 1995, and the company reported net income of $1.5 million. Its markets were growing, and the company improved its manufacturing processes. By this time, GaAs semiconductors were being used in telecommunications to boost the performance of fiber-optic networks. The chips added capacity to a telecommunications network without having to add additional fiber.

In spite of some semiconductor industry instability in 1996, Vitesse reported record revenues of $59.5 million, up 71 percent from fiscal 1995. Net income was $12.6 million, up from $1.5 million in 1995. The company had nearly 300 employees and a record backlog of $36 million.

Vitesse’s market niches—telecommunications, data communications, and automated test equipment (ATE)—were exploding. Internet growth required upgrades to telecommunications networks. Large companies were creating larger computer networks and transferring more data than ever before. High-tech companies needed faster ways to test their products.

Toward the end of 1996 Vitesse raised $108 million for new plant construction through a secondary stock offering at around $36 a share. The company began construction of a new $70 million fabrication facility in Colorado Springs. The facility was needed to keep up with increasing demand from the fast-growing telecommunications market. The plant was completed in 1997 and began production in early 1998. This facility was the only one using six-inch GaAs wafers to produce a large volume of high speed, low power gigabit ICs.

At the end of fiscal 1997, the company had 430 employees. One analyst quoted in Business Journal-Portland said, “Vitesse is definitely the No. 1 player in the telecommunications industry.” Its high-speed circuits could move information at speeds of up to ten gigabytes per second. Vitesse claimed to have 50 percent of the 2.5 Gb/s SONET/SDH communications 1C market. Revenues were $105 million, nearly double sales for fiscal 1996.

Vitesse continued to ride the wave of strong demand for more bandwidth and higher speeds from the communications markets in 1998 and 1999. For fiscal 1998 ending September 30, revenues were $175 million, and net income rose to $53 million. Revenues climbed to $281.5 million in fiscal 1999, due in part to three acquisitions, and net income reached $69.9 million. Communications markets represented 80 percent of revenues, with ATE contributing 20 percent. Tomasetta noted that the Internet was driving sales of communications products, while the ATE market was lagging due to an industry-wide downturn. The company’s stock price surpassed its $51 target set by analysts, and the company announced a stock split for October 1999.

Vitesse completed three acquisitions in 1998 and 1999. In December 1998 it acquired Vermont Scientific Technologies, Inc., which specialized in chip design. A second chip design firm, Serano Systems Corp. of Colorado Springs, was acquired in January 1999. The third and largest acquisition was XaQti (pronounced “Shakti”), a supplier of Internet network processors, for $65 million. The XaQti acquisition was a continuation of Vitesse’s product expansion into higher layers of network processing. It would enable the company to offer customers a more complete solution and more extensive chipsets. According to Tomasetta, “We believe that this acquisition positions Vitesse as a major player in high-end switching and processing.”

Outlook

Vitesse’s telecommunications products supported increasing the speed of each transmission channel and the transmission of multiple channels on a single fiber. Faster standards of transmission represented a natural application of Vitesse’s high-performance and cost-effective GaAs ICs.

Key Dates:

1984:: Vitesse Electronics Corporation is founded by a group of engineers to develop gallium arsenide (GaAs) integrated circuits (ICs).
1987:: Company reorganizes, changes name to Vitesse Semiconductor Corporation, and refocuses on GaAs.
1991:: Vitesse raises $30 million with its initial public offering.
1995:: Company reports its first profitable year as communications markets begin to require faster speeds.
1999:: Company reports a record net income of $70 million on sales of $281.5 million.

Vitesse planned to expand its product line from making chips for the physical layer of the SONET standard, which represented a potential market of about $1 billion, to making chips for other functions such as switching, processing, and interconnection across the backplane. These other areas represented a combined potential market of about $3 billion. Essentially, Vitesse had integrated four SONET functions into two chips, thus doubling their revenue per port while cutting costs for customers. Eventually, Vitesse planned to integrate all the SONET functions into one chip.

Vitesse had also begun to offer some CMOS (silicon) chip designs in addition to its GaAs products. Its goal was to have 20 percent of its revenues from CMOS products and the rest from GaAs by 2001.

To meet the requirements of suppliers to Internet data networking systems, Vitesse had expanded its line of products for high-performance switch and router applications. The acquisition of XaQti brought active-flow processor technology to Vitesse, forming the core of the packet processing components. These products enabled the construction of universal network system platforms for user-driven customization of networks.

In the area of data communications, Vitesse Fibre Channel ICs allowed for the very fast transfer of large volumes of data in Storage Area Networks (SANs), JBOD (Just a Bunch of Disks) and RAID subsystems, and peripheral devices. These Gigabit Ethernet products increased the bandwidth of local area network (LAN) backbones to 1.25Bg/s. The entire line of Vitesse Fibre Channel ICs focused on eliminating bandwidth bottlenecks in SANs, monitoring vital statistics within the system, and supplanting SCSI devices in the fastest networks.

Vitesse also had a history of expertise in the ATE market. The company supplied all of the major U.S. ATE vendors and was rapidly expanding into the Japanese ATE market. With its strong ATE system level expertise and the high-integration, low-power properties of GaAs, Vitesse’s H-GaAs technology was quickly replacing ECL and BiCMOS in the ATE marketplace.

Internationally, Vitesse supplied Japanese manufacturers of telecommunications and ATE equipment as well as system manufacturers in Singapore, Hong Kong, China, and other Pacific Rim countries. It also had expanding operations in Europe to supply telecom and datacom equipment vendors with low-cost, high bandwidth, low power ICs.