Chipmaker says eight of its top 10 customers are cutting back on orders

January 26, 2001

3 Min Read
PMC-Sierra Joins Warnings Chorus

After announcing solid financials and a record year for design wins, chipmaker PMC-Sierra Inc. (Nasdaq: PMCS) warned analysts last night that cancelled North American orders will lead to a "severe inventory correction" and lowered revenue expectations for 2001.

PMC-Sierra reported quarterly revenues of $232 million, up 17 percent sequentially and 152 percent from the same time last year. Earnings per share for the quarter were 34 cents, up six cents from the previous quarter and triple the value of the fourth quarter of 1999. Net revenues for the year were $695 million, and pro forma net income 99 cents per share. Gross margins were about 75 percent for the quarter and 76 percent for the year.

PMC-Sierra also had a record year for new business: It earned 1,894 new design jobs, 566 of which came during the fourth quarter, the majority of them in the optical space.

But, like other chip and component makers reporting earnings this week (see Corning Caveats Rain on Earnings Parade), PMC-Sierra says equipment suppliers are cancelling their orders because their own carrier customers aren't ready to make big buying commitments this year.

"Eight of our top ten customers will go down in revenues for us relative to the fourth quarter," said CEO Bob Bailey in a conference call with analysts last night. As a result, PMC-Sierra expects next-quarter revenues to be between $160 million and $170 million, with earnings per share between 13 and 15 cents. In contrast

In PMC-Sierra's case, those customers include Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU), each of which account for sizeable chunks of the chipmaker's revenues -- Cisco in the "high 20s," and Lucent in the "low double digits," according to PMC-Sierra. Other customers include Nortel Networks Corp. (NYSE/Toronto: NT), ONI Systems Inc. (Nasdaq: ONIS), Redback Networks Inc. (Nasdaq: RBAK), Sycamore Networks Inc. (Nasdaq: SCMR), and Zaffire Inc.

Bailey said PMC-Sierra had a backlog of orders worth $253 million last quarter, but that cancellations, many of them coming only in January 2001, have caused that figure to topple to $143 million for this quarter. As for the second quarter outlook, "It's anybody's guess," Bailey said. "We have no visibility to speak of."

The "booking shortfall" cuts across all product lines, he said, but is concentrated in chips designed for use in edge routers, DSLAMs, voice gateways, and other access gear. But he also warned that WDM chips have recently been hit. "We have seen cancellation of WDM ports in January," he said. "We have a strong optical market but all of a sudden we got cancellations." He reiterated that none of the cancelled orders are linked to just one customer, but have happened across the board.

Like Corning Inc. (NYSE: GLW) in its earnings report yesterday, PMC-Sierra thinks the slowdown in telecom capital spending is not as severe in Europe or the Asia-Pacific region. China, he said, expects to increase its cap ex spending by 50 percent this year; and in Europe, spending will increase between 15 and 20 percent, he said.

PMC-Sierra also has new products planned. Within 3 to 6 months it expects to announce "multiple developments" in the area of 10-Gbit/s Ethernet, executives say. But PMC-Sierra's OC192 chips, which have been late to market compared to the offerings of competitors such as Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), probably won't start showing significant revenues until 2002, despite being "on track" in trials.

Early this morning, shares of PMC-Sierra stock were trading down 7.25 (7.03%), at 95.88.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com

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