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PMC-Sierra Fights Inventory Glut

Light Reading
News Analysis
Light Reading
7/20/2001

Communications chipmaker PMC-Sierra Inc. (Nasdaq: PMCS) last night reported mounting quarterly loss of $13.4 million on revenues of $94.1 million. That second-quarter pro-forma loss translates to 8 cents a share, matching reduced expectations as hard times continue in the industry.

PMC's key customers like Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Corp. (NYSE/Toronto: NT) are still burning off chip inventories while they hibernate through the networking industry’s version of a nuclear winter.

The pro forma figures do not include inventory write-downs, amortization of goodwill, and deferred stock compensation. The company’s net loss was $233 million, or $1.39 a share. That compares with a first-quarter loss of $64 million, or 38 cents a share, on revenues of $120 million. And it contrasts dramatically with a year-ago profit of $49 million, or 27 cents a share, on $151 million revenues. Gross profit margins slipped to 61 percent in the second quarter from 70 percent in the first quarter and 76 percent a year ago.

PMC CEO Bob Bailey blamed the revenue shortfall on inventory buildup in the supply chain. He said contract manufacturers and original equipment manufacturers still hold $54 million in inventory, which should take about two quarters to burn off.

Thus, the company expects orders for the third quarter to slump to the $62 million to $65 million range with gross margins similar to those of the second quarter. Officials predict a third quarter pro forma loss of 17 cents to 19 cents.

Bailey counterbalanced the glum news by noting PMC is focusing on many new products for market areas like metropolitan area networks and wireless infrastructure where inventory buildup is not severe.

Robertson Stephens analyst Arun Veerappan wrote in a recent report that by reducing headcount through attrition and curtailing expenses, PMC should be able to reach break-even at $105 million in revenues. Veerappan noted that PMC is better suited to weather the economic downturn than some of its peers because of its leadership in the metro and access markets. Because PMC has a “fabless” business model, in which it outsources actual chip fabrication, Veerappan believes it should maintain better gross margins than companies that own and operate chip manufacturing plants.

PMC issued an earnings warning June 28, around the time similar cautions emerged from chipmakers Xilinx Inc. (Nasdaq: XLNX), Vitesse Semiconductor Corp. (Nasdaq: VTSS), and Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC). Xilinx and Vitesse will report earnings today. Applied Micro reported yesterday.

PMC-Sierra stock was at $30.50 in Thursday after-market trading on Island, off 3 percent from its $31.31 close.

- Tom Davey, special to Light Reading
http://www.lightreading.com

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