Components Shortage Gets Real
Investors are gazing towards Fishkill, New York, and hoping that IBM Corp.'s Microelectronics Division can handle too much of a good thing. Networking equipment providers are demonstrating insatiable demand for application-specific integrated circuits (ASICs) put together using IBM's ceramic packaging technologies, and a supply contraint on the ceramic substrate may temper growth in the industry.
Light Reading sources close to IBM and its customers say high demand for ASICs, combined with a slower-than-expected ramp-up of some new ceramic packaging technologies, may affect some chip companies and equipment providers during the fourth quarter. Those sources say chip packaging contraints may lead some companies to show lower earnings upside than they have in recent quarters.
"There's been a tremendous demand increase [for ceramic packaged ASICs] in the industry as a whole," says a spokesperson for IBM Microelectronics. "Nobody's getting everything they asked for."
IBM would not comment on specific customers or say whether there are technology delays or product shortages at the firm's Fishkill facilities.
"This will affect several stocks," says one analyst, who requested anonymity. He specifically cited Juniper Networks Inc. (Nasdaq: JNPR), Conexant Systems Inc. (Nasdaq: CNXT), and Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC).
"I had heard that AMCC might have minor supply problems, but I don't think it will severely affect them," a source close to AMCC says.
Applied Micro Circuits Corp.'s customers include Alcatel SA (NYSE: ALA), Cisco Systems Inc. (Nasdaq: CSCO), Juniper, Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Siemens AG (Frankfurt: SIE). But the company isn't worried that its supplies from IBM will soon go soft.
"[IBM] is working diligently to extend capacity, and because of our strategic relationships and my personal relationships with their top management, I'm confident that we'll get what we need next quarter and we will not have a supply problem," says Tom Tullie, AMCC's vice president of sales and supply.
Tullie also contends that industry supply is more the issue. "It's not so much the new technology... but with the Internet demand coming from companies such as AMCC and Juniper, our product forecasts have been going through the roof," he says.
"As a matter of course, there will be spot shortages in the industry, but we have no reason to be concerned about supplies looking ahead," says Marcel Gani, Juniper's CFO.
The demand for ceramic packaged ASICs is rather new. Companies have been packaging several chips together using a common substrate rather than taking months to integrate more functions on a redesigned ASIC. As chips powering networking gear grow smaller and faster, they create more heat, causing electrical resistance that can slow data down. Ceramic packaging helps dissipate heat.
There are less expensive plastic packaging methods, but those don't seem to dissipate heat as well or provide the best electrical connectivity at high speeds, Tullie says.
Other research in the area affirms the level of concern.
A September 5, 2000, note from PaineWebber analyst David Wong says that though AMCC is on track to meet its investors' expectations, it won't sizzle as much as it did in earlier quarters. "We believe that supply constraints from IBM might limit the amount of OC-192 physical layer growth AMCC can achieve both in the September and December 2000 quarters," the research note states.
The bottom line is, although many experts expect well-managed companies such as Cisco and Juniper to negotiate the supply issues and avoid a quarterly disaster, the supply constraints may make it difficult to produce blockbuster quarters in Q4. Many investors have become accustomed to companies handily beating revenue and earnings estimates. But ASIC packaging problems may chip away at their optimism in coming months.
-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com