IPO Look: M/A-COM Technology – Another Semiconductor IPO

Based in Lowell, Massachusetts, M/A-COM Technology (MTSI) scheduled an $100 million IPO with a market capitalization of $815 million at a price range mid-point of $18, for Thursday, March 15, 2011

SUMMARY
MTSI is a relatively low (43%) gross margin semiconductor company focusing CATV, cellular backhaul, cellular infrastructure and fiber optic applications; A&D; and Multi-market, which includes automotive, industrial, medical, mobile and scientific applications.

Dividends paid to stockholders
64% of the IPO is allocated to pay preferred dividends to stockholders.  Plus MTSI paid an $80 million dividend in January 2011.

OBSERVATIONS
For the last four quarters MTSI revenue has been stuck in the $78 million range, with an 8% drop in the December quarter to $73 million from $79 million in the September quarter.

Revenue would have been at the most flat even if the Thailand flood (see below) had not occurred.  December quarter operating income dropped 33% to $8.5 million from $12.6 million.

Thailand Flood
During October 2011, heavy monsoon rains in Thailand caused widespread flooding affecting major cities and industrial parks where there is a concentration of semiconductor manufacturing, assembly and test sites.

One of MTSI’s contract manufacturing suppliers located in Thailand was affected by the flooding. While the inventory held by the affected contract manufacturer was not damaged by the flooding, $2.7 million of orders that were scheduled for shipment to our customers in the three months ended December 30, 2011 were delayed or cancelled as a result of the flooding of the affected contract manufacturer.

MTSI expects revenue to be negatively impacted to a lesser degree in the second quarter of fiscal year 2012. The affected contract manufacturer resumed operations at full capacity in January 2012.

VALUATION
MTSI identifies HITT as it’s primary competitor over all three of its markets.  Based on the valuation comparisons below, MTSI is priced at a premium compared to HITT,based on price-to-sales, price-to-earnings and price-to-book value.

CONCLUSION
Although MTSI is in growth markets, it hasn’t shown much sequential quarterly growth over the past six quarters. Therefore we would pass on the MTSI IPO.

BUSINESS
MTSI is a leading provider of high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum.

MTSI offers over 2,700 standard and custom devices, which include ICs, multi-chip modules, power pallets and transistors, diodes, switches and switch limiters, passive and active components and complete subsystems, across 38 product lines.

CUSTOMERS, PRODUCTS & MARKETS
MTSI serves over 6,000 end customers in three large and growing primary markets.

Primary markets are Networks, which includes CATV, cellular backhaul, cellular infrastructure and fiber optic applications; A&D; and Multi-market, which includes automotive, industrial, medical, mobile and scientific applications.

Semiconductor products are electronic components that customers incorporate into their larger electronic systems, such as point-to-point radios, radar, automobile navigation systems, CATV set-top boxes, magnetic resonance imaging systems and unmanned aerial vehicles.

MTSI has one reportable operating segment, semiconductors and modules.

CUSTOMER CONCENTRATION
In fiscal year 2010, sales to the distributor Richardson Electronics, an Arrow Electronics Company (Richardson), and to Ford each accounted for more than 10% of revenue.  Sales to the top 10 direct and distribution customers accounted for 58% of revenue.

In fiscal year 2011, sales to Richardson and Ford each accounted for more than 10% of revenue, and sales to the top 10 direct and distribution customers accounted for an aggregate of 61% of revenue.

COMPETITION
MTSI competes with Hittite Microwave (HITT) across all three of its primary markets.

Other significant competitors include, among others, Aeroflex (ARX), Avago, Inc. (AVGO), Microsemi (MSCC), RF Micro Devices, Inc. (RFMD), Skyworks Solutions (SWKS) and TriQuint Semiconductor, Inc. (TQNT).

HISTORY
MTSI was incorporated in Delaware on March 25, 2009 and on March 30, 2009, acquired 100% of the outstanding stock of M/A-COM Technology Solutions Inc. and M/ACOM Technology Solutions (Cork) Limited and the related M/A-COM brand, which we refer to as the M/A-COM Acquisition.

MTSI acquired Mimix, a supplier of high-performance GaAs semiconductors, on May 28, 2010 (Mimix Merger) for its complementary products and technologies in MTSI’s primary markets.

MTSI’s financial statements are presented as if the Mimix Merger occurred on the date of MTSI’s incorporation in March 2009, when MTSI came under common control with Mimix.

DIVIDEND POLICY
MTSI declared a one-time special dividend in the aggregate amount of $80.0 million on its Series A-1 convertible preferred stock, Series A-2 convertible preferred stock and common stock in January 2011.  No more dividends planned.

USE OF PROCEEDS
MTSI expects to net $94 million from its IPO.  $60.0 million of the proceeds will be used to holders of Class B convertible preferred stock a preference payment.

Remaining proceeds are allocated for general corporate purposes, including working capital.