Vitesse Conference Call

I am listening to the Vitesse Semiconductor (vtss) conference call.

Many people have asked me what I thought about owning Vitesse stock. My only answer was that “I didn’t own any”.

Today, on the Vitesse conference call, the details came out. Revenue recognition issues.

There is still something unseen, and related to Vitesse.

Notes from the call are below:

CALL SUMMARY

No communication since April 17th. Starting process to regain trust. Goal is to be transparent as possible. Ground rules for the call - No questions on backdating since this is the domain of the special internal committee. Sorry.

Agenda:

1. Review of events

Discussed Timeline of events

2. Stat report on business

Illustrated strategy. Breakpoints, Core Competencies. Buzzwords

50% Telecom
30 Storage
20 Ethernet

Q3 Update

NPD - Legacy Vitesse business Q3 53%. Stronger market conditions. Optical modules strong. Ethernet over SONET/SDH just starting to ramp, now being deployed into two US Carrier networks. Industry’s first GPON FTTH chipset.

Storage - FC, SAS, SATA. SAS is key focus. 2G FC is legacy. 30%. FC 2G is declining. Replaced by SAS. Q406 SAS increase will beat decline in FC for first time. ROC’s Raid on Chip, SAS expanders. Intel blackbird chipset for SAS. 6MM dollar backlog.

EPD - 16% of business. Entry level products. $1MM this quarter in high port count device. PHYs are 20% less power than competition, and build in cheaper process. First octal PHY.

Tight cash expenditure, required some work with suppliers. Thanks suppliers for support.

3. Update on Financials - CFO

Items under review and likely to result in restatement:

- Stock option accounting
- Revenue recognition
- Application and Accounting for Customer credits
- Cash Management Policy
- Periodic evaluation of inventory and impact on gross margins

Current cash position 29.2 end of June. 29.1 at end of December. Raised 48.2M net in between, burned 48M in cash.

Cash spend - Most is 31.6 in Working Capital
- $23M Inventory Increase, optimistic sales forecasts.
- AR’s up $4M. Accelerated cash payments from distis made in Dec.
- 4.3M decrease in accounts payable, realignment of vendor priorities.
- 1.8M Interest
- 4.2M Professional Costs

Reported cash at end of Q106 vs. Q306 wrong because of
- Factoring of receiveables (!!! Dear God !!!)
- Shipping large amounts of goods to distributors and negotiating incentives for distis to remit cash prior to end of Q.
- Shipments from our vendors received after quarter end
- Stretching of vendor payments beyond standard terms

- These practices have stopped.

Actual Consumtion Based Revenue. Value of product sold minus distrubution margin. Not impacted by changes in distrubution inventory. Point of Purchase (POP) revenue is a sell in model, revenue recognized when goods are shipped to distributor. Point of Sale (POS) is reported when goods are shipped or a sell through.

62% of Vitesse revenue is POP. VTSS revenue would rise above net consumption if distributor inventories were increasing.

Net Consumption - Assumes a sell through model.
Q106 47.6M
Q206 49.7M
Q306 50.7M

While consumption has increased, inventory at distis has grown too and increased reported revenue above consumption.

Channel Inventory Increase
Q1 6.4M
Q2 10.5M
Q3 -3.1M

3-9M excess inventory in cha