2023-08-21 07:30:32 ET
Summary
- Strategic review underway, including potential M&A.
- TGAN share price down ~65% from 52 week high.
- Transphorm's total revenue up 13% Y/Y, product revenue down 32% Y/Y.
- Product design-ins increased ~ 15% Q/Q.
- Raised $7.6 million from rights offering in July.
Introduction
Transphorm, Inc. ( TGAN ) is a $165 million market cap semiconductor company specializing in the application of gallium nitride "GaN" to power semiconductors. The technical advantages of GaN vs. legacy silicon support a very rapidly growing market for GaN devices.
I'm not going to recap GaN advantages in this update. For details on TGAN and GaN, see my background article, Transphorm: Turning Technology into Revenue , in July 2022. The competition in the GaN power semiconductor market is described in an August 2022 article The Race for Market Share .
The data for this article comes primarily from three TGAN documents published on 14 August 2023; the Q1 2024 fiscal year(i.e. for calendar Q2 2023, they run a non-standard fiscal year) Earning Call , the Investor Presentation , and the 10-Q Quarterly Report .
Investment Thesis
TGAN closed at $2.72 per share on 18 August 2023. The $2.54 low for the day is a 67% decline from its 52 week high of $7.67 in November 2022.
TGAN is now priced essentially as an option that the company will be acquired (perhaps the most likely outcome, with a formal "strategic review" underway), or reach positive cash flow before running out of cash.
The market response over the last year suggests that TGAN should be viewed as an increasingly speculative bet, and investors should approach it with their eyes wide open and appropriate due diligence.
Transphorm's Revenue Growth is Too Slow
TGAN's target for revenue growth is 50% CAGR. The Seeking Alpha chart below conveniently summarizes the core problem; for whatever reason, this revenue growth isn't happening.
Revenue had been more or less flat for the last year, and product revenue is down. Note that for the FQ1 2024 quarter in the above chart, product revenue is only half of the quarter's revenue.
The Last Quarter
I'm going to primarily focus here on revenue and products; but one should note there are other areas of activity, and progress in manufacturing and testing.
Revenue
- $5.9 million revenue, up 13% Y/Y
- $3.0 million product revenue, down 32% Y/Y
- $2.9 million initial revenue from a 3 year $15 million US government contract
Products
- 70% of product revenue is from high power (300+ watts)
- low power: 10+ new design-ins (total now 100+), with 30+ in production (2 new)
- high power: 15 new design-ins (total now 75+), with 30+ in production (1 new)
- $175 million "probability weighted" 5 year product pipeline
- achieved cost milestone with GaN solution for 2-wheeler EV 600 watt charger now cheaper than silicon
Finance
- $6.8 million non-GAAP operating expenses vs, $7.5 in the previous quarter
- $6.7 million operational cash burn (excludes CAPEX)
- paid off $12 million revolving credit facility with Nexperia, no debt at end of quarter
- $3.3 million cash and equivalents at end of quarter
- non-dilutive asset based debt in process
Share Count
- 59.2 million share outstanding
- 4 million stock warrants outstanding, 3.9 million with an exercise price of $5 or more
Subsequent to end of quarter, as of 14 August 2023:
- in August, completed rights offering to existing shareholders, raised $8 million ($7.6 million net), issuing 2.4 million shares of stock at $3.30 per share
- 61.8 million shares outstanding
Strategic Review
Primit Parikh - CEO, President & Co-Founder, commented on the strategic review. Key points:
- beginning strategic review; goal of maximizing shareholder value
- scope includes equity or debt financings, licensing opportunities, and M&A opportunities
- have received inbound third-party interest/inquiries
- strong macro interest, including recent M&A activity in the GaN arena
The recent M&A activity reference here is almost certainly the all cash $830 million acquisition of privately held GaN Systems by Infineon Technologies AG ( OTCQX:IFNNY ), announced 02 March 2023. The announcement noted that "by 2027, market analysts expect the GaN revenue for power applications to grow by 56% CAGR to US$2 billion."
Patents
TGAN makes the case that they have a large and valuable patent portfolio. I did an inventory of the patents last year (table below). Of the 1,031 patents, 51% are non-exclusive. TGAN actually owns 32%. A 2022 third party assessment of the value of owned and exclusive patents is $170 million.
Transphorm vs Competitors Stock Ratings
We can take a look at the summary assessments expressed via ratings of TGAN and two direct competitors, Navitas Semiconductor Corporation (NASDAQ: NVTS ) and Power Integrations, Inc. (NASDAQ: POWI ). It's notable that Wall Street is much more enthusiastic than Seeking Alpha's Quant assessment.
The SA Quant Factors capture the key problems - no profits, and insufficient progress in fixing that problem.
TGAN Stock Valuation
Wall Street is still positive, with a $5.75 price target, although that's down by about 45% from a year ago.
The figure below shows share price performance for the last year. Note that there is a small difference among sources; YChart numbers has 52 week Hi/Lo as $7.51/$2.65, Seeking Alpha has $7.67/$2.50, which matches the Morningstar numbers. TGAN is down about 65% from the 52 week high.
The high since the February 2022 IPO was $7.81. The rights offering price in July 2023 was $3.30.
What would it be worth to an acquirer? That would probably depend on strategy, technology, and product fit. An individual investor would have to weigh as yet unrealized potential vs. demonstrated performance, and discount for cash flow risk.
Analysis
Under Promise, Over Deliver Demonstrates More Strength Than Spin
Some years ago I was the customer for a large contract engineering effort. During a periodic progress review with the vendor, one of their young engineers quipped that his part of the project was "following the schedule at a safe distance". His manager - who had a plan to fix the problem - was not very happy with the frank admission in that venue, but as the customer, I appreciated the engineer's transparency and lack of spin. And they delivered, on schedule.
My personal preference is for management to minimize spin, under promise and over deliver. It's a subjective assessment, but I was not impressed with the tenor of the earnings call.
Products and Assets
TGAN has designed, produced, shipped, and sold real commercial products in volume. Their product offerings are good enough for customers to have designed them into nearly 200 products, with 60 or more of those in production. They claim significant technical advantages, at least in some applications.
However, in a competitive market, whatever technical advantages they may have not been decisive.
For the most recent quarter, design-ins grew by 25, about 15%, but their in-production numbers only grew by 3, about 5%. About 30% of their low power design-ins are in production, and 40% of their high power design-ins.
TGAN has other assets, i.e. patents and production facilities, whose market value is difficult to assess. For example, if we discount the $170 million third party patent valuation by 50%, that would yield a value of $1.40 per share.
Relative Performance
Another way to assess TGAN is relative performance. We can look at TGAN and two public companies identified above who are direct competitors in the power semiconductor market, POWI and NVTS.
All three have faced the same market for power semiconductor. POWI might be considered a proxy for the power electronics market, and NVTS a closer comparison of a smaller company exploiting the advantages of GaN (and lately SiC) over legacy silicon.
POWI is much the larger, currently with a $4.5 billion market cap, and had $650 million in revenues in 2022. Both revenues and stock price are down, but POWI is solidly profitable, has $350 million in cash and no debt, and pays a dividend that's been steadily growing for 10 years.
NVTS currently has a $1.35 billion market cap, and had $38 million revenues in 2022. But revenues were up about 58% Y/Y in 2022, and are expected to double in 2023. Although NVTS is not yet profitable, they have no debt and $175 million in cash. For their SiC products, they report that "we are selling all we can make".
TGAN currently has a $165 million market cap, and $16.5 million in revenue for the fiscal year ending 31 March 2023, down 32% Y/Y. TGAN is not yet profitable, has no debt, and $3.3 million in cash at the end of the most recent quarter.
The contrasts are fairly stark.
If we assume all of the above factors and issues are weighed by the market, we can look at the market assessment, expressed in market cap.
Cash Runway
How long is TGAN's cash runway? It would be useful if TGAN would explicitly report that, but lacking that report, we will attempt a very back-of-the-envelope estimate.
TGAN ended the recent 30 June 2023 quarter with $3.3 million in cash, and an "operational cash burn" rate excluding CAPEX of $6.7 million for the quarter.
Subsequent to the end of the quarter, TGAN received $2.9 million cash from the government contract and $7.6 million net cash from the rights offering. We will simplify the timing by assuming both happened on the first day of the current quarter, so that the cash balance was $3.3 + $2.9 + $7.6 = $13.8 million on 01 July 2023.
Looking forward, the government contract is $15 million over 3 years, which would be on average $1.25 million gross per quarter; assuming a 60% margin, providing $0.75 million net cash flow per quarter.
If we assume a doubling of product sales going forward, i.e. an incremental $3.0 million per quarter), with a 40% margin, that would yield an incremental $1.2 million cash per quarter from product sales
Thus:
- $13.8 million cash on hand 01 July 2023
- - $6.7 million current burn rate per quarter (i.e. at current level of activity)
- + $0.75 million net cash per quarter from the government contract
- + $1.2 million net cash from incremental product sales
- = $4.7 million per quarter burn rate going forward
$13.8/$4.7 = 2.9 quarters, i.e. ~ nine months from 01 July 2023. That's suggests an end of the runway ~ 31 March 2024, or the end of TGAN's fiscal Q4 2024.
In the recent Q1 FY 2024 Earnings Call, CEO Primit Parikh said:
we are working on securing non-dilutive asset and AR-based debt financing. We also have active discussions on certain licensing possibilities as we work to secure a financial run rate well into fiscal 2025.
The CFO, Cameron McAulay , reinforced the same point:
We continue to progress towards completion of asset-backed, nondilutive debt, and we expect to conclude these facilities in the near term.
Recall that TGAN's fiscal year is offset from the calendar year. Fiscal 2025 starts 01 April 2024, so if "well into fiscal 2025" is mid-way through fiscal 2025, that would be 30 September 2024, with these financing options adding about 6 months to our back-of-the-envelope estimate above.
In any case, "well into fiscal 2025" sound like about 13 months from now.
I expect that TGAN has a much better and more detailed estimate, which I'd love to see laid out, but I suspect the results aren't dramatically different. That they did the rights offering, on the terms that they did, are actively pursuing these financing option, and are assessing M&A options, might be viewed as supporting evidence for this view.
Risks
Absent some significant change, customers may begin to be wary of TGAN's stability as a supplier. For example, production for 2 wheeler customers, potentially a big win, is several quarters away.
Investor Takeaway
In my last article in April 2023, I wrote:
Transphorm remains on the cusp of moving from an expensive science project to a profitable and growing business, riding a huge secular shift from silicon to GaN.
However, today TGAN is a small cap that has yet to achieve either profits or free cash flow. There are, in my view, significant risks. TGAN must execute, and soon. A cautious investor might question whether TGAN has adequate financial resources to reach positive cash flow, without material dilution, or at all.
This assessment still rings true to me. Growing product revenue enough to reach positive free cash flow is still the fundamental problem.
TGAN has talked about “incoming interest” regarding M&A; I suspect they may well have an informal offer on the table, and perhaps a much clearer path in view than they can publicly discuss.
Polishing up my crystal ball, I would look for buyout deal before year end, with a price near $5 per share. Nexperia (owned by Wingtech Technology Co., Ltd, Shanghai Stock Exchange) has a high bandwidth relationship with TGAN, and would be one potential acquirer, although there may be issues, e.g., the government contract, with that.
Under the SA system, I'd rate TGAN a very weak Hold at the current price; at this point there's just not a lot of capital recovery from selling.
Personally, I’m not selling at this price, but I'm not buying either. I think the best and most likely outcome now is for TGAN to be acquired. If the price drops below $2, I might consider adding a small amount in anticipation of a buyout, but would consider that an extremely speculative purchase.
For further details see:
Transphorm Stock: Maybe Not Fast Enough