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Telcom Chips Get Happy

Light Reading
News Analysis
Light Reading
1/23/2004

Earnings season is turning out jolly for telecom chips suppliers, as results so far point to increased demand and even profitability in 2004.

Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), PMC-Sierra Inc. (Nasdaq: PMCS), and Vitesse Semiconductor Corp. (Nasdaq: VTSS) turned in cheerful earnings reports this week, and each gave an upward nudge to analysts' revenue predictions for the March quarter.

Telecom chip business had begun to pick up last year, but executives were wary of saying "recovery." Chip companies can get fooled when customers replenish inventory, creating a demand surge that doesn't stick. This quarter, they've got evidence: news of North American RBOC buildouts and a strong earnings report from Juniper Networks Inc. (Nasdaq: JNPR). (See Juniper Confidently Carries Q4 and En Fuego!)

"There's no question we can say telecom [chips] coming out of '03 turned to the upside," says analyst Jeremy Bunting of Thomas Weisel Partners. "It's based not only on the external decline of inventory across the board but increased spending on services."

The boost to services is aided by last year's upgrades in cell phones and PCs, where new technologies helped increase network usage. "Now that that's happened, we're going to see some follow-on demand" first in enterprise spending, and then in telecom, says Dushyant Desai, analyst with CE Unterberg Towbin.

Here's how the numbers fall:

  • AMCC's numbers were aided by acquisitions, but officials say communications chip sales were up 19 percent from last quarter. Overall revenues for the December quarter were $38.2 million, compared with $25.1 million for the prior quarter. AMCC is still getting socked with losses: $26.4 million, or 9 cents per share, for the December quarter.
    (See AMCC Boosts Q4 Revs, Cuts Loss.)
  • PMC-Sierra increased its revenues for the fourth quarter in a row, hitting $70.6 million, compared with $63.1 million in the September quarter. Net income based on generally accepted accounting principles (GAAP) was $9.5 million, or 5 cents per share, for the December quarter.
    (See PMC-Sierra Boosts Q4 Revenues.)
  • Vitesse hit pro-forma profitability -- barely -- ahead of analysts' expectations, with net income of $172,000 for the December quarter. By GAAP measures, the company had losses of $8.0 million, or 4 cents per share. Revenues were $50.3 million, compared with $42.8 million in the previous quarter. (See Vitesse Hits Profitability in Q1.)
Storage continues to be an important growth area for all three companies (see PMC Still Likes Storage). But all three are cheered by signs that their traditional telecom businesses are showing signs of life.

In terms of cash, analysts say the three are in good shape. AMCC continues to carry the heftiest bankroll, with $846 million in cash and investments. Company officials have said they want to make more acquisitions along the lines of the JNI Corp. purchase (see AMCC Moves Into Storage).

AMCC and PMC stocks dropped slightly after their reports, as analysts couldn't help noting the stocks were looking expensive. Vitesse was up 75 cents to $8.57 in midday trading today.

— Craig Matsumoto, Senior Editor, Light Reading

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BobbyMax
BobbyMax
12/5/2012 | 2:36:55 AM
re: Telcom Chips Get Happy
There are no positive indicators that chip sale is going to increase in the coming years. It appears to be propoganda that business is picking up. There is no brisk or even accetable sale of telecom equipment. The only chip that has shown some growth potential of DSL chips. There will be very nominal growth due to next generation of SONET/SDH equipment. AMMCC, Vitesse and PMC are beaten down companies and their chip sale is questionable. Big things are being talked about SANs, but I do not see any significant growth in this area.
chip_select
chip_select
12/5/2012 | 2:36:32 AM
re: Telcom Chips Get Happy
Ah, Bobby's on crack again. How's that going for you?

I guess when these chip companies have double digit sequential growth for the last 2 quarters, and are projecting it for the next 2, that's not a positive indicator that chip sales are increasing?

There's no way that PMC and AMCC are going to come out and herald long term massive growth after the beating they took in the last 3 years, but it seems to me they're thinking it.

It may turn out that telecom chips are worse than DRAM for boom-bust cycles. The reason is that when a platform from the big OEMs start shipping in volume, there can be a huge jump in the chip companies revenue, just from the IP they have in that platform. The key is to look at who has the most hardware on the selling platforms at Nortel/Cisco/Lucent, etc, and get your future projections from there.

As for long term growth, I believe that it inevitable. The net's not getting any smaller. However, it's going to be a bumpy ride the whole way.

gzkom
gzkom
12/5/2012 | 2:36:15 AM
re: Telcom Chips Get Happy
The question is how many companies can sustain a price/sales ratio of 10-20.
Toad680
Toad680
12/5/2012 | 2:32:13 AM
re: Telcom Chips Get Happy
Is anyone here familiar with Transwitch's EoS chips? They seem to have a lead at the OC-3 and OC-12 speeds. To the extent that 2004 sees growth in EoS, should TXCC stand to benefit from the trend?

VTSS really seems to have the OC-48 market locked up with design wins. They have already received an $8mm initial order from Siemens.

Any comments welcome.
truelight
truelight
12/5/2012 | 2:32:12 AM
re: Telcom Chips Get Happy
I heard the chip does not work ?
Toad680
Toad680
12/5/2012 | 2:32:10 AM
re: Telcom Chips Get Happy
The transwitch chip or the vitesse chip? And do you have any more details on what/when you heard it?

thanks
Toad680
Toad680
12/5/2012 | 2:32:09 AM
re: Telcom Chips Get Happy
my understanding was that carriers are currently trialing access devices containing TXCC's ethermap-3. which leads me to believe that at least the OC-3 speed chip works.

Their OC-48 and OC-12 seem late to market from the time of the announcement. Where you referring to these?
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