Value Find: Centillium Communications Inc.
Continued insider buying and the sale of a money-losing legacy business suggest shares in this microcap tech company may have finally found a bottom and could be poised for a sharp rebound.
Fremont, Calif-based Centillium Communications Inc. (Nasdaq: CTLM) has a long and undistinguished history as a public company. In fact, since being founded in 1997, Centillium has done only one thing fabulously well — lose money. At last count, the $32 million market capitalization microcap had racked up an accumulated loss of $229 million since inception.
Poor stock performance has followed the growing losses. The stock price has been more than cut in half over the past year, declining from $2 a share to a measly $0.71. Looking back at the past five years, the stock price has declined an even uglier 90%. After posting revenue of $160 million in 2001, which marked the end of the tech boom, revenue has declined every year since. For 2007, Centillium posted revenue of $39.2 million, compared with $64.6 million a year ago.
Given the company’s steady losses and eroding revenue, Centillium would generally be a name to avoid and let wallow in its own misery. However, with a balance sheet still stuffed with cash, a lowly valuation and activist investors circling the stock, Centillium deserves one final look. Centillium ended 2007 with $35 million in net cash on hand. This was before the small semiconductor solutions provider sold its badly declining digital subscriber line (DSL) solutions business to a rival for a net gain of $8 million in cash. This transaction closed in mid-February. With this in mind, Centillium should have ended March with around $44 million in cash.
The fact that Centillium sports a negative enterprise value, in the sense of market cap plus debt minus cash, is in part due to the company’s continued losses, which each quarter eat away at its cash balance. For example, for the fourth quarter, Centillium posted revenue of $8.6 million, down from $10 million a year earlier, and a non-GAAP loss of $4.2 million, or $0.06 a share, compared with a year-ago loss of $6 million, or $0.15 a share. Total cash on hand declined sequentially by $4.9 million to $36.8 million. Centillium also has $1.5 million in short-term debt.
With the sale of the DSL business, Centillium claims it will reduce its operating expenditures by $21 million a year. Centillium’s two remaining businesses, end-to-end systems on a chip solution for the Fiber-to-The-Premises (FTTP) and Voice-over-Internet Protocol (VoIP) markets, are small but growing. The FTTP and VoIP businesses have a current revenue run-rate of $23 million with 38% year-over-year growth. Centillium expects this growth rate to accelerate as the year progresses and new customer wins kick in. For the first quarter, Centillium expects revenue of around $6 million and non-GAAP operating expenditures of approximately $8.5 million.
While this all sounds good, Centillium admittedly has a history of losses and badly disappointing its investors. Thus, the fact that Centillium has two activists breathing down its neck is a good thing. Activist investors Bryant Riley and Lloyd Miller III together hold a 20% stake in Centillium. Other 5% holders include T. Rowe Price and Royce & Associates. So far, Centillium has been a dud for Riley. His fund paid nearly $2 a share for the stock in November 2006. In February, instead of cutting his losses, he bought an additional $250,000 worth of stock around the $0.77 level. Riley hasn’t publicly made noises about shaking up Centillium’s board and management, but common sense dictates that the company is on notice.
Assuming the tech market doesn’t go into deep freeze, we can see a scenario over the next year where Centillium moves closer to achieving cash flow breakeven and would still have $30 million in cash on hand. Assume the company is then generating run-rate revenue of around $30 million with 50%+ gross margins. Value this revenue at 0.75-times sales and you’re at an enterprise value of $52.5 million, or $1.25 a share, good for a 75% gain from the stock’s recent price of $0.77.
Of course, we can also paint a scenario where, even after shedding the DSL business and further cutting its operating expenses and reducing its breakeven level, Centillium finds a new way to disappoint. Centillium’s revenue has historically been concentrated among just a handful of customers, making future growth in its FTTP and VoIP businesses far from certain. Further, company management could always make a foolish strategic move with Centillium’s remaining cash stash. Finally, Centillium shares are lightly traded and any signs of an exit by Riley, or other large Centillium holders, would almost undoubtedly drive the lowly stock even lower.
Add it all up and Centillium (CTLM) may be best described as a “speculator’s delight.” This stock is a “value find” only appropriate for medium-to-higher risk investors who are patient and can afford to roll the dice. I would look to accumulate the name below the $0.80 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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