PMC-Sierra Struts on the Street

Networking semiconductor vendor PMC-Sierra Inc. (Nasdaq: PMCS) basked in Wall Street's praise for its latest quarter on Thursday, citing strong demand for broadband equipment -- including optical gear -- as the basis for its success. But questions were raised about the vendor's ability to sustain its winning position.

The financials sing: Revenue for the second quarter of 2000 totaled $134 million -- 124 percent higher than second-quarter revenue in 1999, and 30 percent higher than the preceding quarter. Pro forma net income was $39 million, or 23 cents per share -- 191 percent higher than figures for the same quarter of 1999, and 40 percent higher than the preceding quarter.

Nearly all of this quarter's revenue -- $225 million, or 95 percent - came from PMC-Sierra's high-end networking chips. And chairman and CEO Robert L. Bailey thinks that's the key to his company's future. "Carriers have an insatiable appetite for bandwidth," he said in a presentation to Wall Street analysts. As a result, he said makers of IP routers, optical switches, and digital cross-connects are clamoring for PMC-Sierra's chips. And he sees that trend continuing strongly.

PMC-Sierra faces some significant challenges, though. For one thing, it's been on a massive shopping spree, and it must now integrate its purchases into a coherent whole. In all, it has acquired or made commitments to acquire six component companies since January 2000 -- the latest being Quantum Effect Devices Inc. (Nasdaq: QEDI), a maker of MIPS processors for network devices, for which PMC-Sierra bid $2.3 billion eariler this week.

Bailey maintains that PMC-Sierra can sustain at least 15 percent growth in the near term, even with the massive expense associated with buying and bringing all of these companies into its fold. Still, the challenge of doing this can't be denied.

The company also faces issues of meeting demand -- a so-called "pinch in the manufacturing chain." Bailey says PMC-Sierra now maintains nine turns of inventory, even though its goal is to carry only six. Much of this, Bailey says, is due to the extra customization required to create chips for broadband applications.

And the firm faces some tough competition. Earlier this week, rival Applied Micro Circuits Corp. (Nasdaq: AMCC) reported its own strong results for the first quarter of fiscal 2001, including $74.2 million in revenue, a 134 percent increase over the same period last year. And today, another competitor, Vitesse Semiconductor Corp. (Nasdaq: VTSS), reported latest-quarter revenues of $114 million, up 56 percent from the same quarter last year.

Thursday's earnings announcement followed a strong day of trading for PMC-Sierra, whose stock closed at 220, up 20 7/8 points.

--by Mary Jander, senior editor, Light Reading http://www.lightreading.com