Chilling Optical Chip Dip
Unfortunately (or fortunately, depending on your point of view), communications chip companies don't make such a good indicator for the optical systems business, because systems companies will first work down their built-up chip inventories when their sales pick up. This means that chip companies will likely be the last to benefit when the networking industry finally recovers.
The inventory glut appears to put most of the chip companies in the position of a long, painful waiting process.
"Unfortunately, it's not surprising. We've been issuing notes over the past several weeks warning investors that there'll likely be some room under these companies' guidance," says Cody Acree, managing director at investment bank Frost Securities Inc.
On Monday, AMCC announced it expects revenue for the quarter ending on June 30, 2001, to fall between $40 to $45 million, with a pro forma net loss of 4 to 6 cents per share.
On Tuesday, Vitesse announced quarterly revenue expectations of $60 million and a pro forma loss per share of 6 cents.
Both companies blamed their guidance reductions on the "continued weakness in demand," represented by inventory backlogs and a lack of sizeable new orders.
They also are hedging their bets as to when things may improve. "Demand has not picked up at a rapid pace, and recovery is still a ways away," AMCC CEO Dave Rickey told analysts in a conference call Monday. Inventory "overhang" is so bad, he said, that it's negating any upsides, such as a reduction in order cancellations.
AMCC and Vitesse, along with competitors PMC-Sierra Inc. (Nasdaq: PMCS) and TranSwitch Corp. (Nasdaq: TXCC), have seen sales decline dramatically since December, according to Frost's Acree. "TranSwitch is down 77 percent over the last two quarters, AMCC 70 percent, and Vitesse 64 percent," he says. He anticipates similar losses for PMC-Sierra.
Not all the news is bad. The optical semiconductor makers will probably hit bottom this quarter, says Acree. Things will probably pick up after a "fairly lethargic" autumn. After that, his long-term projections are "great."
"Four or five companies are supplying the entire industry with absolutely critical components to drive Internet infrastructure and optical networking," he says. "They'll pick up, unless we have some sort of severe economic recession, which is unlikely."
- Mary Jander, Senior Editor, Light Reading