Telcom Chips Get Happy

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