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Analysis: Freescale readies for IPO

Posted: 28 Apr 2010 ?? ?Print Version ?Bookmark and Share

Keywords:Freescale IPO? automotive? microcontroller?

Freescale Semiconductor Inc. chairman and CEO Rich Beyer would not put a timeline on the company's plans for an initial public offering but, clearly, the automotive and networking IC vendor is several steps closer to returning to the equity market as a publicly traded company.

In fact, it won't be a surprise if the company sometime later this year or latest by early 2011 announce its much-speculated IPO, a move that would mark the completion or near-completion of several years of reorganization and restructuring that started with the company being taken private in a leveraged buyout in 2006.

"Freescale has come out of the recession in a very healthy state. The debt and capital structure is also healthy. The shipment that we are making are being received for production by customers and not merely going into inventory restocking, we have good visibility for the next three months and slightly beyond and we are on track with the revenue growth we have achieved," said Rich Beyer, chairman and CEO of the company in an interview. "An IPO is the most likely next scenario for Freescale."

Many of Freescale's current bondholders would welcome an IPO. It's already obvious bondholders are happy to roll over the company's debts rather than press for immediate repayment. Not only has Freescale's sales and operating positions improved but the company is also benefitting from a resurgent U.S. and global economy, rising demand for semiconductor products and improving overall sentiments for its key automotive and networking markets.

Here are five reasons Freescale will return to the equity market within the next year:

1. Healthy sales growth: Freescale's quarterly revenue rose above $1 billion in the March ended quarter, putting the company on track to exceed $4 billion in annual revenue with the additional possibility of declaring net profit on a GAAP basis.

While annual sales would still be substantially below the $6.4 billion the company posted in 2006, operating metrics have also significantly improved and the completion of its multi-year reorganization have refocused Freescale on higher-margin IC products, giving it a much leaner but healthier look.

2. Higher design wins: Freescale is obviously on a roll as far as customers are concerned. The company continues to rack up design wins in key microcontroller, RF, analog and sensor and networking and multimedia markets and indications are that this will continue through the current quarter and perhaps well into the third quarter, according to Beyer.

"Design wins continue very strongly. We are confident the second quarter is going to be a growth quarter and the third quarter would also be good," Beyer said.

3. Improved financial position: In the Q1, Freescale posted a smaller operating loss on a GAAP basis and adjusted earnings before interest taxes and depreciation and amortization of $194 million versus adjusted EBITDA loss of $21 million in the year-ago quarter. This is a huge achievement for the company because it shows the fundamentals of its operations, which exclude non-cash charges, have significantly improved.

Even on a GAAP basis, Freescale is likely to post operating profit in the second or third quarter as sales continue to grow. Furthermore, gross profit margin in Q1 strengthened sequentially to 36.2 percent from 32.5 percent in Q4 09 and up sharply from 21 percent in Q1 09.

As sales continue to rise, Freescale's operating metrics will also strengthen, pushing the company towards profitability and improving its profile with current and potential investors.

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