GigOptix Inc (GIG) - An Evaluation

GigOptix Inc (GIG) – An Evaluation

Who is GigOptix?
GigOptix, Inc., the successor to GigOptix LLC, was formed as a Delaware corporation in March 2008 in order to facilitate a combination between GigOptix LLC and Lumera Corporation (“Lumera”). It is located in Palo Alto, CA. GigOptix, Inc. is a fabless supplier of semiconductor and optical components that enable high-speed end-to-end information streaming over the network and address emerging high-growth opportunities in the communications, industrial, defense and avionics industries. The business is made up of two product lines: the High-Speed Communications (HSC) product line and the Industrial product line. The Company offers an array of high performance MMIC solutions that enable next generation wireless microwave systems up to 90GHz and drivers, TIAs and TFPS optical modulators for 40G and 100G fiber-optic telecommunications and data-communications networks. It also offers a wide range of digital and mixed-signal ASIC solutions.

How did you learn about them?
A stock screen search for stocks hitting 52 week highs on heavy volume a few months ago listed it.

Let’s look at criteria? Are they growing Revenue?
For a quick look at Revenue:

2011: 32
2012: 37
2013: 29
2014: 33

Thus 2013 revenue was DOWN 21% and 2014 revenue was UP 14%.
During the nine months ended September 27, 2015, the United States, Italy, and Hong Kong accounted for 30%, 26%, and 16% of total revenue, respectively. (by destination of products sold)

How about earnings?

2014: Q1:-2 Q2:1 Q3:2 Q4:3
2015: Q2: 2 Q2:6 Q3:6 Q4:estimated 6

Their TTM earnings are now $0.15, and they have beat earnings expectations for the last 7 straight quarters. Next year is reported to be $.19 per share or 26% increase.

Is there a reasonable PE?
It’s about 19.6 as of close today.

Tell me more what they actually do?
GIG’s High Speed Comms (HSC) product line offers a broad portfolio of high performance semiconductor devices and multi-chip-modules (“MCMs”) aimed predominantly at the telecom, datacom, consumer-electronics, and wireless markets, and includes, among others, (i) 100 to 400 gigabit per second (“Gbps”) laser and optical-modulator drivers, and trans-impedance amplifier (“TIA”) devices; (ii) 10-100 Gbps Clock-data-recovery (“CDR”) devices; (iii) mixed signal radio frequency integrated circuits (“RFIC”) at 50 GHz and above; (iv) power amplifiers and transceivers, as well as monolithic microwave integrated circuits (“MMIC”), for microwave and wireless applications at frequencies higher than 50 GHz; (v) integrated systems in a package (“SIP”) solutions for both fiber-optic and wireless communication systems; and (vi) radio frequency (“RF”) chips for various consumer applications, such as global navigation satellite systems (“GNSS”).

GIG’s Industrial product line offers a wide range of digital and mixed-signal application specific integrated circuit (“ASIC”) solutions for various industrial applications used in the military, avionics, automotive, security and surveillance, medical and communications markets.

Can they meet demand?
They seem to be expanding rapidly into international markets.
In June 2015, the Company established a Japanese wholly owned subsidiary, GigOptix Japan GK.
On September 22, 2015, the Company announced signing a definitive agreement to acquire Terasquare, Co. Ltd., a Seoul, Korea-based, fabless semiconductor company and provider of low power, CMOS high speed communication interface semiconductors for 100Gbps Ethernet, Fiber Channel, and EDR Infiniband applications.

Do they have a moat?
Its products are highly customized and typically developed in partnership with key “Lighthouse” customers, generating engineering project revenues through the development stage and larger future product revenues through these customers and general market availability.
Gross profit for the nine months ended September 27, 2015 was $18.3 million, or a gross margin of 62%, compared to a gross profit of $13.8 million, or a gross margin of 58%, for the nine months ended September 28, 2014. The increase in gross margin is primarily due to change in product mix and improved production efficiencies.

What is your overall impression?

Not nearly as good as when I started this evaluation, which I guess is why we do this! While I love the focus on high speed communications, they seem to be growing thru acquisitions and not organic growth. They have not been profitable very long though they have great margins that are increasing. They are also at risk due to reliance on a few key customers. For the nine months ended September 27, 2015, three customers accounted for 41% of total revenue. For the nine months ended September 28, 2014, one customer accounted for 28% of total revenue.
I almost didn’t post when I was half way thru this, but decided to share my thumbs down decision anyway. Heck of a price increase though (160% in last 9 months)!!, but going to pass on this one for now.

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That’s a great write-up, F1Fun, especially learning from your write-up and deciding it wasn’t for you. There are a lot of companies out there and you can only buy a limited few of them, so it pays to be choosy.

Thanks for your contribution,

Saul

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