Description

Transwitch is a former tech high flyer that is now down 99% from it's high
and boasts a cash rich balance sheet and a promising, albeit speculative,
future.


VALUATION

Equity Market Cap $68 million
Less: Cash 221 million
Add: Cvt. Debt @ Mkt 68 million

NET ENTERPRISE VALUE ($75 MILLION)


So here is a former tech/telecomm darling that is now being left for
worse than dead.

A cursory glance at the income statement would tend to be supportive of
that view as the September quarter revenues declined to $3.7 million from
as much as $51 million in the December '00 quarter. A more detailed glance,
however, reveals a worthwhile speculation.

Transwitch designs and sells custom integrated circuits for use in telecomm
networks. Customers such as Siemens or Cisco will design Transwitch's
chips into their circuit boards. The leading indicator of business and
the best measure of the company's competitiveness is the design win. While
times are extraordinarily difficult, TXCC is managing to achieve numerous
design wins which will translate into future revenues. As of the lastest
quarter, TXCC had achieved 48 design wins at over 30 (mostly top tier)
companies, which is indicative of an intriguing potential for the next
cycle.

A NOTE ABOUT DESIGN WINS

1.) At the peak, several years ago, the company has perhaps twice as many
design wins. One way of looking at this is design wins are down, but have
by no means shriveled to nothing.

2.) Design wins in todays environment are more meaningful. Customers are
doing fewer projects. The opportunity set is smaller, but much more
focused.

3.) Approximately 70-75% of design wins will actually translate into a
project that goes ahead.

4.) Importantly, customers are "top tier" firms like Cisco, Nortel,
Lucent, Siemens, NEC, Tellabs.

5.) At the peak, more design wins were at smaller, more marginal, firms.
Furthermore, a smaller percentage of design wins (but more projects
overall) went to production.

6.) The primary competition is from the internal design teams at their
customers. Other competitors are PMC Sierra and Agere.


Business, while terrible, is showing signs of life. Several days ago,
Goldman Sachs wrote:

"TXCC: Business actually showing signs of life?

Although path to profitability is so far away that it is difficult to get excited about the possibility of upside
surprise, we believe TXCC is starting to see encourage signs and could post an upside to estimates for the first
time in a year and a half if current trends continue. We believe business trends were soft throughout all of Q3,
which caused TXCC to guide revs down to $3M this qtr, from $3.7M in Q3. DURING THE LAST MONTH
OR SO, HOWEVER, WE BELIEVE IT HAS SEEN SEVERAL CUSTOMERS START TO COME BACK
WITH ORDERS STRONGER IN ASIA (SHANGHAI BELL, NEC) AND EUROPE (SIEMENS) AND
SOME SIGNS OF LIFE IN NORTH AMERICA (NT, TLAB, CSCO). ALTHOUGH THE HIGH BURN
RATE AND VERY DISTANT PATH TO PROFITS ($28M REV B/E) KEEPS OUR RATING AT
UNDERPERFORM, WE COULD SEE FOLLOW THROUGH FROM THE RECENT STOCK PRICE
MOMENTUM IF BUSINESS TRENDS CONTINUE TO IMPROVE AND TXCC INSTITUTES MORE
AGRESSIVE COST CUTTING PLANY BY EARLY NEXT YEAR."


Yes, it's a speculation. I wouldn't buy it just to recover the cash value.
The key here is that under the surface, the company continues to invest in
R&D and is achieving numerous design wins at important customers, which
speaks volumes about the company's intellectual property and patent
position, particularly given the extraordinarily depressed operating
environment. Even a modest recovery in business could restore a positive enterprise value
to this company, which would be at least a double from here.


CATALYSTS

48 design wins at 30 important customers are leading to increased business
prospects.

Rock bottom valuation accompanied by Goldman Sachs observation that
business is showing "signs of life."

Catalyst

48 design wins at 30 important customers. Recognition that business is
showing "signs of life."