Any semiconductor company starting from scratch and moving into a market where the competition includes Motorola Inc, NEC Corp and Texas Instruments Inc had better have a good idea, a good product and, above all, powerful customers. Newly floated Galileo Technology – if its growth rate over the last year is anything to go by – has all three. Second quarter sales, revealed just eight days after the company made its debut on the US Nasdaq stock exchange in July, soared 950% to $8.4m, and net profit increased from a loss of $414,000 to a profit of $2.26m. That equates to a net profit margin of 26.8%, which is good even by the standards of a semiconductor company without the overhead of fabrication facilities. Furthermore, the company already has cost-reduction plans in place should such margins attract new competitors to the sector. Formed in 1993 by Avigdor Willenz, a graduate from Technion, Israel’s answer to the Massachusetts Institute of Technology, and former chief engineer at another fab-less semiconductor company, Integrated Device Technology, Galileo designs switched Ethernet local area network controllers and remote-access wide area network controllers based on relatively cheap and standardised MIPS and Intel i960 microprocessor cores. Until recently, network systems vendors developed their own ASICs (application specific integrated circuits) for such uses – a far more expensive option. Galileo is among a small group of semiconductor companies which has learnt how to integrate analog and digital functions onto a single chip, in this case, around industry standard processor designs. For the network systems vendors which are its customers, this cuts both costs and time to market.
Suffered delays
What makes Galileo stand out among the minnows is its range of big name customers, which includes Bay Networks Inc, Hewlett-Packard Co, Hitachi Ltd and Lucent Technologies Inc. By far the largest customer is Cisco Systems Inc, which uses Galileo components in its 7000 series routers. But small is not always so beautiful and as a fab-less semiconductor designer, Galileo is at the mercy of its manufacturing partner, the Taiwanese Semiconductor Manufacturing Company. TSMC not only provides access to its ASIC libraries but also produces 90% of the company’s products. In the past Galileo has suffered delays in receiving supplies and warned investors before it floated that it could suffer the same fate again in the future. That is essentially a logistics problem which should be overcome by good management and by second-sourcing. More serious threats would be posed if its biggest customers, such as Cisco or HP, moved into semiconductor design themselves. Cisco accounted for 25% of Galileo’s sales in the first quarter of 1997 and HP 12.5%. A more likely threat, however, is presented by competitors such as NEC, Motorola and Texas Instruments more aggressively targeting the same customers. So far, that threat has not stopped investors going crazy for Galileo stock. The company floated at $17 a share but, on its debut, Galileo soared 51% to $25.75. Westmont should perhaps keep his fingers crossed that TSMC, as well as Galileo, continues to deliver the goods – on time.
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