Zarlink Branches Out

The chip company's two-year-old plan to expand its markets could come to fruition in the next few quarters

August 4, 2003

3 Min Read
Zarlink Branches Out

Maybe it's because they're based in Canada, or maybe it's because the name sounds as if it came out of a book of runes, but Zarlink Semiconductor Inc. (NYSE/Toronto: ZL) hasn't gotten much attention in its turnaround efforts.

In fact, when Zarlink executives toured San Francisco financial firms last week, it was received more as a coming-out party than a routine update. "It shows how you fall off the Wall Street radar when people don't hear from you in a while," says Sandy Harrison, analyst with Pacific Growth Equities Inc..

A refresher course in Zarlink was appropriate, because the company claims it's within months of delivering on some of its more promising products, such as ultra-low-power RF devices for wireless communications and TDM emulation chips for IP networks.

Zarlink was formed in 2001 when Mitel sold its systems business -- and the "Mitel" name -- to Terence Matthews, leaving behind the semiconductor division. CEO Patrick Brockett was hired to run that business, bringing with him new executives with semiconductor experience, and the company changed its name later that year.

From there, Zarlink has worked on stabilizing after the downturn, just like anyone else. While the company is still large, at 1,250 employees, it has cut expenses significantly. By September, Zarlink expects its quarterly breakeven point to be around $52 million in revenues, compared with $123 million two years ago. Harrison's estimates have the company turning a modest profit by March of next year.

(For its first quarter, which ended in June, Zarlink reported revenues of $53.7 million and a loss of $6.2 million; see Zarlink Narrows Q1 Loss).

The company has also kickstarted its R&D by bringing in executives with semiconductor experience. A key metric there is new-product introductions: Zarlink plans to have 80 for the fiscal year ending March 2004. "Three years ago, that R&D was producing about 16 products a year. Frankly, it was not world class," says Jitesh Vadhia, senior vice president of Zarlink's network access division.

So what's in this two-year-old plan? Mostly, it's an ongoing obsession with semiconductors for voice traffic, with a separate consumer division designing parts for consumer products such as set-top boxes.

But a key theme for the company is an expanded role in telecom, with plans to dip into some of the industry's trendier new developments.

For starters, Zarlink is finishing development on circuit emulation chips announced more than a year ago (see Zarlink Unveils Access Processor). These parts put TDM-based traffic onto IP networks, and they require a facility with TDM timing circuits, which Vadhia says has always been a Zarlink specialty. Circuit emulation promises to heat up as the corresponding IEEE standards come together. Competitors in this area will include Axerra Networks Inc., Lycium Networks Ltd., and Redux Communications Ltd. (see Lycium: It's All in the Timing).

Zarlink has also been developing optical components at an R&D facility in Jarfalla, Sweden, where it's using gallium arsenide (GaAs) and indium phosphide (InP) to build parts such as PIN diodes, Vertical Cavity Surface Emitting Lasers (VCSELs), and parallel optical transceivers (see Zarlink Offers Transceiver). But a more promising area might be in duplexers for fiber-to-the-premises buildouts: "We're going to see some products pan out by the end of this year," Vadhia says.

Finally, Zarlink hopes to find wireless communications uses for its ultra-low-power group, which develops radio-frequency (RF) chips used for pacemakers and hearing aids.

Vadhia lists 802.11 access points as a possible market for the group, but Harrison thinks cell phones are a more likely target. "I don't see a lot of opportunity in 802.11," he says, adding that more promising markets would be on "the radio front and the microphone front."

Zarlink could start producing handset components in two or three quarters, Harrison says. If that doesn't pan out, the company has another medical application Brockett wants to explore: the ingestible pill that transmits pictures from inside a patient's guts. Yum.

— Craig Matsumoto, Senior Editor, Light Reading

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