Following in the footsteps of PMC-Sierra Inc. (Nasdaq: PMCS), Vitesse Semiconductor Corp. (Nasdaq: VTSS) appears to have abandoned development of packet-processing silicon (see PMC-Sierra Pulls Packet Silicon).

In developments that have come to light following last week's earnings call, Vitesse will suspend development of a future four-port Gigabit Ethernet network processor and the OC192 (10 Gbit/s) device planned for 2003 (see Vitesse Pumps Up its Net Processor ), according to reports from the Linley Group, a technical consultancy for network processors.

The 100-strong network processor division, which comprises the staff of startups Sitera and Xaqti, which Vitesse bought in 2000, will be cut down to 45 staff, who will be reassigned to other projects (see Vitesse to Buy Sitera for $750M). In aggregate, Vitesse paid about $1.3 billion for the startups. Despite the company's stated intention to continue marketing and supporting its existing IQ200 and IQ2200 products, this move will essentially see Vitesse bow out as a supplier of network processors, says one analyst.

"Although Gigabit Ethernet is the biggest segment of the network processor market and is growing rapidly, we doubt that many customers will be interested in the IQ2200 without a roadmap to higher performance," says Linley Gwennap, senior analyst at Linley.

As is the way with these things, the truth trickled out a few days after the company's earnings announcement. At the end of last week, Vitesse posted a massive loss of $887.2 million, or $4.48 loss per share, on revenues of $43 million (see Vitesse Reports Q3, Lays Off).

This huge loss includes a $695.5 million writeoff of goodwill, which under new regulations, must be recorded all at once, rather than being spread across several quarters. Pro forma net loss was $20.6 million.

Unsurprisingly, Vitesse announced restructuring plans at the same time, which include curtailing certain R&D projects, consolidating manufacturing facilities, and laying off 200 of its 1,160 staff. Two of the development areas that have been curtailed are network processors and traffic manager chips -- both chips specific to processing packet-based traffic.

"With these actions we expect our break-even point to be approximately $60 million per quarter," said Vitesse's CEO, Lou Tomasetta, in a prepared statement. "More importantly, we will focus our development efforts on products that give us the most immediate return on investment."

According to Linley's Linley Gwennap, the IQ2000 had fallen well behind low-end market leaders -- the IXP1200 from Intel Corp. (Nasdaq: INTC) and Applied Micro Circuits Corp. (AMCC)'s (Nasdaq: AMCC)nP family -- in terms of design wins. "Vitesse had been losing more NPU customers than it gained during the first half of this year," he notes.

Vitesse will also be abandoning any future development of its PaceMaker traffic manager chip, which it gained from its acquisition of Orologic in April 2000 for $450 million. Again, the company says it plans to continue marketing the chip, but without any R&D investment, the product will quickly fall behind competition from the likes of Azanda Network Devices (see Azanda Flips Its Chips).

All in all, Vitesse doesn't have much to show for the $1.3 billion it spent to acquire Sitera, Xaqti, and Orologic, Gwennap points out.

Vitesse did not return calls.

But these layoffs appear to be part of the ebb and flow in a competitive environment and don't indicate a problem with the network processor market in general, it seems. Other vendors have been pushing forward with new products.

Earlier this week, two companies announced new network processors: Agere Systems (NYSE: AGR) announced that it had shrunk its original four- or six-chip Payload Plus solution into a single device called INP5 (see Agere Supplies Pumps, Processors); Silicon Access Networks Inc. also announced that it had begun shipping its 20-Gbit/s network processor (see Silicon Access Tries 20-Gig).

— Pauline Rigby, Senior Editor, Light Reading
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