Chipmaker Techwell bought - does it mean anything?

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04/29/2010
The component makers are one step removed from you, the installer, but it can be interesting to see what they're up to, as they can drive the manufacturers in new directions and they have an effect on price. A couple days back I had an interesting call with OmniVision, which makes chips for IP cameras and is touting much better low-light performance, and you'll see a story on that coming down the pipe. Today, I'm taking note that Techwell has been purchased by Intersil, a company I had never heard of before a few weeks back when they were announcing the intent to buy Techwell, which has chips in "70 percent of DVRs," according to an interview I did with the company a while back. At the time, I was talking with Techwell because of their plan to bring "HD to the masses," making DVRs, essentially, much better able to handle HD feeds and display them. They've at least had a hand in the HD explosion of the past 18 months. They also provided at Techwell an interesting window into the market when the financial crisis was just hitting us. If no one's buying chips, no one's buying DVRs, which means no one's buying video surveillance products. Certainly, their information was predictive and 2009 was a cruddy year for a lot of installers. Here's how Techwell describes its security play in its most recent 10k:
Our security surveillance products integrate important functions required to display, store and transport analog video signals from security surveillance cameras. For example, we integrate multiple video decoders into a single semiconductor. As a result, this semiconductor is able to receive and decode analog video signals from multiple cameras into a standard digital format. In addition, we integrate a multiplexer, a key technology required to combine multiple video signals into a single video signal, and a display processor, a key technology required to display multiple video channels. In December 2008, we introduced a new security surveillance product which includes a 16 channel multiplexer and supports the display of multiple standard definition and high definition video sources. We currently sell our security surveillance products to customers for use in numerous applications including DVRs, PC-based DVRs, NVRs and multiplexers.
Basically all (97 percent) of the company's business comes from Asia, where manufacturers put their chips into any number of products. 54 percent is sold into China. It's interesting to note, too, that the company doesn't actually "make" anything:
We do not own or operate a semiconductor fabrication, packaging or testing facility. We depend on third-party vendors to manufacture, package and test our products. By outsourcing manufacturing, we are able to avoid the cost associated with owning and operating our own manufacturing facility. This allows us to focus our efforts on the design and marketing of our products.
Everything's made for them in Taiwan, and they even note that they don't have any kind of long-term agreement with the manufacturer. So, now Intersil has bought the company for $370 million/$18.50 a share, which is a pretty good price if you bought in at the 52-week bottom of $6.35 last May. Really, it's a pretty good price no matter how you look at it. Techwell did $63 million in revenue in 2009, and though they had a good Q1 2010 of $20 million and you could project that out to $80 million for 201, you're still looking at something like 4.8-5.5x revenue, which ain't too shabby. Why? Well, Intersil must see a return to the glory days on the horizon. In 2007, Techwell did $14 million in net income on just under $60 million in revenue, a quite healthy 24 percent net margin. If they can scale that margin as they grow the company, they can quickly throw some good cash to the bottom line. They must attribute the complete collapse of that net margin, to 11 percent and then 5 percent in 2008 and 2009, almost wholly to the economy. And if they're that positive about Techwell's prospects they must be equally positive about the prospects for the video surveillance industry (and in-car video, for that matter), which is a good sign for the industry's growth as a whole. Still, seems like a lot to pay for this company...

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