Vitesse (VTSS) Reports Third Quarter Fiscal Year 2012 Results

Vitesse Semiconductor Corporation (NASDAQ: VTSS), a leading provider of advanced IC solutions for Carrier and Enterprise networks, reported its financial results for the third quarter of fiscal year 2012, ended June 30, 2012.

“Our vision and operational management continue to deliver, resulting in both operating and net income profitability this quarter,” said Chris Gardner, CEO of Vitesse. “Vitesse’s strategy to leverage our disruptive technology to gain share in the high-growth Carrier and Enterprise networking markets is also working. Innovations such as VeriTime™, our patent-pending distributed timing technology with the industry’s highest accuracy IEEE1588v2 timing, strengthen our market leadership.”

“While market challenges persist, we remain confident that our product development investments and solid execution will drive our revenue growth. Near-term, we see this trend with core revenue growing at 11% sequentially this quarter. Looking out, revenues from our new products will double from 2012 to 2013 and double again in 2014. In fact, the design wins expected to drive this revenue growth in 2013 are currently in or moving to production.”

Third Quarter Fiscal Year 2012 Financial Results Summary

• Total net revenues were $30.3 million, compared to $29.7 million in the second quarter of fiscal year 2012 and $36.0 million in the third quarter of fiscal year 2011.
  • Product revenues were $25.7 million compared to $27.2 million in the second quarter of fiscal year 2012 and $31.9 million in the third quarter of fiscal year 2011.
  • The product lines contributed the following as a percent of product revenue as compared to the second quarter of fiscal year 2012:
    • Carrier networking products: 45.1% versus 35.3%
    • Enterprise networking products: 52.6% versus 48.3%
    • Core Carrier and Enterprise networking products: 97.7% versus 83.6%
    • Non-core products: 2.3% versus 16.4%
  • Intellectual property revenues totaled $4.6 million compared to $2.5 million in the second quarter of fiscal year 2012 and $4.1 million in the third quarter of fiscal year 2011.
• Product margins were 56.2% compared to 61.0% in the second quarter of fiscal year 2012 and 57.8% in the third quarter of fiscal year 2011.
• Operating expenses decreased to $16.9 million from $18.0 million in the second quarter of fiscal year 2012 and $22.2 million in the third quarter of fiscal year 2011.
• Operating income was $2.1 million up from $1.1 million in the second quarter of fiscal year 2012 and $326,000 in the third quarter of fiscal year 2011.
• Non-GAAP operating income was $3.3 million up from $2.3 million in the second quarter of fiscal year 2012 and $1.5 million in the third quarter of fiscal year 2011.
• Net income, which included a $5.8 million gain on the embedded derivative, was $4.7 million, or $0.18 per basic and $0.16 per fully diluted share. This compares to a net loss, which included a $5.3 million loss on the embedded derivative, of $6.2 million, or $0.25 per basic and fully diluted share, in the second quarter of fiscal year 2012; and net income of $6.6 million, which included an $8.0 million gain on the embedded derivative, or $0.26 per basic share and $0.21 per fully diluted share, in the third quarter of fiscal year 2011.
• Non-GAAP net income was $140,000, or breakeven per basic share and fully diluted share, compared to non-GAAP net income of $313,000, or $0.01 per basic and breakeven per fully diluted share, for the second quarter of fiscal year 2012; and a non-GAAP net loss of $202,000, or $0.02 per basic and fully diluted share, in the third quarter of fiscal year 2011.

Balance Sheet Data at June 30, 2012 as Compared to September 30, 2011

• Cash balance increased to $20.6 million, compared to $17.3 million;
• Accounts receivable totaled $10.7 million, compared to $9.6 million;
• Inventory totaled $14.8 million, compared to $20.9 million; and
• Working capital increased to $27.2 million, compared to $26.7 million.

Fourth Quarter Fiscal 2012 Outlook

For the fourth quarter of fiscal year 2012, ending September 30, 2012, Vitesse expects revenues to be in the range of $28.0 million to $31.5 million and product margins are expected to be between 55% and 57%. Operating expenses are expected to be between $18.0 million and $19.0 million.

August 7, 2012 Conference Call Information

A conference call is scheduled for Tuesday, August 7, 2012, at 1:30 p.m. Pacific Time / 4:30 p.m. Eastern Time to report financial results for the third quarter of fiscal year 2012.

To listen to the conference call via telephone, dial 888.203.7667 (U.S. toll-free) or 719.325.2111 (International) and provide the passcode 2470079. Participants should dial in at least 10 minutes prior to the start of the call. To listen via the Internet, the webcast can be accessed through the Vitesse corporate web site at www.vitesse.com.

The playback of the conference call will be available approximately two hours after the call concludes and will be accessible on the Vitesse corporate web site or by calling 877.870.5176 (U.S. toll-free) or 858.384.5517 (International) and entering the passcode 2470079. The audio replay will be available for seven days.

About Vitesse

Vitesse (NASDAQ: VTSS) designs a diverse portfolio of high-performance semiconductor solutions for Carrier and Enterprise networks worldwide. Vitesse products enable the fastest-growing network infrastructure markets including Mobile Access/IP Edge, Cloud Computing and SMB/SME Enterprise Networking. Visit www.vitesse.com or follow us on Twitter @VitesseSemi.

Vitesse is a registered trademark of Vitesse Semiconductor Corporation in the United States and other jurisdictions. All other trademarks or registered trademarks mentioned herein are the property of their respective holders.

VTSS-F

Cautions Regarding Forward Looking Statements

All statements included or incorporated by reference in this release and the related conference call for analysts and investors, other than statements or characterizations of historical fact, are forward-looking statements that are based on our current expectations, estimates and projections about our business and industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms, and variations or negatives of these words. Examples of forward-looking statements in this release include the Company’s financial outlook for its fourth fiscal quarter and anticipated long-term revenue growth Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that could affect the Company’s forward-looking statements include, among other things: identification of feasible new product initiatives, management of R&D efforts and the resulting successful development of new products and product platforms; acceptance by customers of the Company’s products; reliance on key suppliers; rapid technological change in the industries in which the Company operates; and competitive factors, including pricing pressures and the introduction by others of new products with similar or better functionality than the Company’s products. These and other risks are more fully described in the Company’s filings with the Securities and Exchange Commission, including the Company’s most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q, which should be read in conjunction herewith for a further discussion of important factors that could cause actual results to differ materially from those in the forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

A non-GAAP financial measure is a numerical measure of a company’s performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Other companies may use different non-GAAP measures and presentation of results.

We provide non-GAAP measures of non-GAAP income (loss) from operations and non-GAAP net income (loss) as a supplement to financial results based on GAAP income from operations and GAAP net income. The Company believes that the additional non-GAAP measures are useful to investors for the purpose of financial analysis. We believe the presentation of non-GAAP measures provides investors with additional insight into underlying operating results and prospects for the future by excluding gains, losses and other charges that are considered by management to be outside of the Company’s core operating results. Management uses these measures internally to evaluate the Company’s in-period operating performance before taking into account these non-operating gains, losses and charges. In addition, the measures are used for planning and forecasting of the Company’s performance in future periods.

In deriving non-GAAP income (loss) from operations from GAAP income (loss) from operations, we exclude stock-based compensation charges, amortization of intangible assets, as well as restructuring and impairment charges. In deriving non-GAAP net income (loss) from GAAP net income (loss), we further exclude gain or loss on the embedded derivative. Stock-based compensation charges, amortization of intangible assets and gain or loss on the embedded derivative represent charges that recur in amounts unrelated to the Company’s operations. Restructuring and impairment costs relate to strategic initiatives that result in short term increases in costs that end with the fulfillment of the initiative and cost reductions in future periods.

The non-GAAP financial measures we provide have certain limitations because they do not reflect all of the costs associated with the operation of our business as determined in accordance with GAAP. Non-GAAP income (loss) from operations and Non-GAAP net income (loss) are in addition to, and are not a substitute for or superior to, income (loss) from operations and net income (loss), which are prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. A detailed reconciliation of the non-GAAP measures to the most directly comparable GAAP measure is set forth below. Investors are encouraged to review these reconciliations to appropriately incorporate the non-GAAP measures and the limitations of these measures into their analyses. For complete information on stock-based compensation, amortization of intangible assets, restructuring and impairment charges, and the change in the fair value of our embedded derivatives, please see our Form 10-Q for the three months ended June 30, 2012.

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
								June 30,								September 30,
									2012								2011
								(in thousands, except per share data)
ASSETS
Current assets:
	Cash							$	20,586							$	17,318
	Accounts receivable, net								10,724								9,591
	Inventory								14,796								20,857
	Restricted cash								92								404
	Prepaid expenses and other current assets								1,985								2,039
		Total current assets							48,183								50,209
	Property, plant and equipment, net								4,530								5,934
	Other intangible assets, net								1,625								1,781
	Other assets								2,805								3,070
								$	57,143							$	60,994
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable							$	5,234							$	5,198
	Accrued expenses and other current liabilities								13,208								14,463
	Deferred revenue								2,580								3,878
	Current portion of debt and capital leases								11								11
		Total current liabilities							21,033								23,550
	Other long-term liabilities								1,518								1,927
	Long-term debt, net								15,742								15,444
	Compound embedded derivative								4,023								7,796
	Convertible subordinated debt, net								42,064								40,736
		Total liabilities							84,380								89,453
Commitments and contingencies
Stockholders’ deficit:
	Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at June 30, 2012 and September 30, 2011								1								1
	Common stock, $0.01 par value: 250,000 shares authorized; 25,315 and 24,470 shares outstanding at June 30, 2012 and September 30, 2011, respectively								253								245
	Additional paid-in-capital								1,827,977								1,824,433
	Accumulated deficit								(1,855,468	)							(1,853,138	)
		Total stockholders’ deficit							(27,237	)							(28,459	)
								$	57,143							$	60,994

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
						Three Months Ended June 30,														Nine Months Ended June 30,
							2012							2011							2012							2011
						(in thousands, except per share data)
Net revenues:
Product revenues						$	25,730						$	31,856						$	81,867						$	103,855
Intellectual property revenues							4,557							4,132							8,148							6,772
Net revenues							30,287							35,988							90,015							110,627
Costs and expenses:
Cost of product revenues							11,270							13,432							34,028							40,776
Engineering, research and development							10,513							12,502							32,518							41,582
Selling, general and administrative							6,292							9,455							22,095							29,892
Restructuring and impairment charges							4							211							36							554
Amortization of intangible assets							88							62							234							288
Costs and expenses							28,167							35,662							88,911							113,092
Income (loss) from operations							2,120							326							1,104							(2,465	)
Other expense (income):
Interest expense, net							1,950							1,929							5,823							6,486
Gain on compound embedded derivative							(5,755	)						(7,951	)						(3,773	)						(2,491	)
Loss on extinguishment of debt							–							–							–							3,874
Other (income) expense, net							(20	)						25							21							(33	)
Other (income) expense, net							(3,825	)						(5,997	)						2,071							7,836
Income (loss) before income tax expense							5,945							6,323							(967	)						(10,301	)
Income tax expense (benefit)							1,234							(227	)						1,363							(78	)
Net Income (loss)						$	4,711						$	6,550						$	(2,330	)					$	(10,223	)
Net income (loss) per common share – basic						$	0.18						$	0.26						$	(0.09	)					$	(0.42	)
Net income (loss) per common share – diluted						$	0.16						$	0.21						$	(0.09	)					$	(0.42	)
Weighted average common shares outstanding – basic							25,302							24,447							24,951							24,266
Weighted average common shares outstanding – diluted							38,413							37,543							24,951							24,266

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED RECONCILIATION OF GAAP NET INCOME (LOSS) TO NON-GAAP NET INCOME (LOSS)
							Three Months Ended June 30,																Nine Months Ended June 30,
								2012								2011								2012								2011
							(in thousands, except per share data)
GAAP net income (loss)							$	4,711							$	6,550							$	(2,330	)						$	(10,223	)
Adjustments:
Stock-based compensation charges								1,092								926								3,301								2,534
Amortization of intangible assets								88								62								234								288
Restructuring and impairment charges								4								211								36								554
Gain on compound embedded derivative								(5,755	)							(7,951	)							(3,773	)							(2,491	)
Loss on extinguishment of debt								–								–								–								3,874
Total GAAP to non-GAAP adjustments								(4,571	)							(6,752	)							(202	)							4,759
Non-GAAP net income (loss)							$	140							$	(202	)						$	(2,532	)						$	(5,464	)
Net income (loss) per common share
Basic:
GAAP net income (loss)							$	0.18							$	0.26							$	(0.09	)						$	(0.42	)
Adjustments *								(0.18	)							(0.28	)							(0.01	)							0.20
Non-GAAP net income (loss)							$	–							$	(0.02	)						$	(0.10	)						$	(0.22	)
Diluted:
GAAP net income (loss)							$	0.16							$	0.26							$	(0.09	)						$	(0.42	)
Adjustments *								(0.16	)							(0.28	)							(0.01	)							0.20
Non-GAAP net income (loss)							$	–							$	(0.02	)						$	(0.10	)						$	(0.22	)
UNAUDITED RECONCILIATION OF GAAP INCOME (LOSS) FROM OPERATIONS
TO NON-GAAP INCOME FROM OPERATIONS
GAAP income (loss) from operations							$	2,120							$	326							$	1,104							$	(2,465	)
Adjustments:
Stock-based compensation charges								1,092								926								3,301								2,534
Amortization of intangible assets								88								62								234								288
Restructuring and impairment charges								4								211								36								554
Total GAAP to non-GAAP adjustments								1,184								1,199								3,571								3,376
Non-GAAP income from operations							$	3,304							$	1,525							$	4,675							$	911
* Included in the adjustments are calculations required by the two class method relative to participation rights of our preferred shares.