Comms chips

AMCC Faces Flat Revenues

Applied Micro Circuits Corp. (AMCC)'s (Nasdaq: AMCC) product lineup is in a transition period that will keep revenues flat and margins down for the time being, CEO Kambiz Hooshmand said this week during the company's earnings conference call.

The comments, coupled with AMCC's second-quarter earnings report, chilled investors and sent AMCC's stock down 19 cents (7.25%) to $2.43 by late Thursday afternoon.

Much of the trouble comes from AMCC's traditional business of communications chips, which officials said will see flat revenues for the next two to six quarters -- not exactly the kind of numbers investors want to hear.

The blame could be put on AMCC's switching products, which will see declining revenues during that time. That could offset the growth AMCC sees in network processors and transport chips, where "the growth in new products is more than offsetting the decline in older products," said Daryn Lau, an AMCC VP and general manager, on the call. The same trend isn't holding for the switching products, he added.

"We found management's tone was a bit troubling, particularly regarding a flat environment for comm," wrote analyst Allan Mishan of CIBC World Markets in a note issued this morning. But he added that AMCC "is moving in the right direction" and that the two-to-six quarter window "could prove conservative."

The company has managed to build some business in storage networking, but there, too, AMCC is shifting gears, moving to SATA RAID devices from Fibre Channel. That's a shorter-term transition, though, and should be completed by next quarter, Hooshmand said.

AMCC's embedded processors -- technology acquired from IBM Corp. (NYSE: IBM) last year -- were the big growth area in the second quarter, rising 7.7 percent to $16.4 million in revenues. (See AMCC Powers Up.) But the catch is that embedded processors carry lower margins than the 60 percent enjoyed by the storage and communications chips, meaning this growth is holding back AMCC's overall gross margins. "In the short term we are growing faster in the lower margin portions of our business," Hooshmand said.

All told, AMCC expects revenues to remain flat for the third quarter, which ends in December. That would follow a flat second quarter, where AMCC reported revenues of $64.9 million and losses of $6.4 million, or 2 cents per share, compared with first-quarter revenues of $64.7 million and losses of $4.2 million, or 1 cent per share. (See AMCC Reports Q2.)

For its second quarter a year ago, AMCC reported revenues of $61.1 million and losses of $18.3 million, or 6 cents per share.

AMCC's pro forma net income for the second quarter was 1 cent per share, matching analysts' expectations, according to Thomson Financial.

— Craig Matsumoto, Senior Editor, Light Reading

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