Zarlink Loses Its Telecom Nerve

Much like the anticipated Cubs/Red Sox World Series, a telecom recovery just ain't gonna happen, according to Patrick Brockett, CEO of Zarlink Semiconductor Inc. (NYSE/Toronto: ZL).

In Zarlink's earnings call Thursday, Brockett blamed a stalled telecom recovery for Zarlink's decision to drop telecom-related R&D and cut 5 percent of its roughly 1,100 employees. As a result of the layoffs, Zarlink will take a $4.5 million restructuring charge for its quarter ending in December (see Zarlink Reports Q3).

"The much-anticipated recovery in telco capex [capital expenditure] spending is not happening," Brockett says.

"Telco" in this case refers to Zarlink's T1/E1 and T3/E3 devices. The company makes plenty of other chips, including devices for cellular handsets (they count as consumer products, not telecom) and medical equipment (see Zarlink Branches Out).

The comments puzzled analysts because, at exactly the same time, PMC-Sierra Inc. (Nasdaq: PMCS) reported a profitable quarter. Brockett countered that news by noting that Exar Corp. (Nasdaq: EXAR), a fellow T1 and T3 chip vendor, had reported difficulties in Asia (see PMC-Sierra Profits in Q3 and Exar Reports Q2).

All this means is that the recovery -- at whatever level it exists -- remains spotty, says analyst Sandy Harrison of Pacific Growth Equities Inc.

"It's not a wholesale recovery," says Harrison. "This is becoming more and more of a stock picker's market, rather than one where you'd buy a basket of stocks."

While Brockett admits he doesn't have specifics, he's certain that the Asian markets, particularly China, have slowed spending. "[Asia] has come off the rail for us, and that's what's hurting us, and it is affecting legacy as well as new products," he says.

According to Brockett, customers are enthused about Zarlink's newer telecom offerings, particularly chips that run TDM emulation over IP or Ethernet networks. But those customers aren't ready to buy yet, because their customers -- carriers and service providers -- aren't ready to spend. With real revenues a year or two away, Brockett wants to halt R&D on those products and shift the investment to areas "where I know I'm getting some traction."

"When you face this [troubled market] for two years and there's no sign of it accelerating, then I think the universe is trying to tell you something, is it not?" he says. [Ed. note: Brockett obviously lacks the intestinal fortitude of a Cubs fan; on the other hand, he's doing a pretty good impression of a Bostonian.]

For its second quarter ended September 26, Zarlink reported losses of $18.9 million, or 15 cents per share, on revenues of $46.6 million. During the year-ago period, Zarlink reported losses of $11.9 million, or 10 cents per share, on revenues of $46.2 million. For the quarter ending in December, Zarlink is predicting revenues around $47 million and losses of about 10 cents per share.

— Craig Matsumoto, Senior Editor, Light Reading
dljvjbsl 12/4/2012 | 11:19:54 PM
re: Zarlink Loses Its Telecom Nerve One way to look at the eveidence from Zarlink is that the recovery will happen in the local enterprise with VoIP spreading out from local installations. The carriers have lost their dominating role in the definition of services. One reason for the failure of the bubble was the concentraion on the provision of services by carriers. This has never been a popular or successful strategy.
dljvjbsl 12/4/2012 | 11:19:52 PM
re: Zarlink Loses Its Telecom Nerve I am wondering what the current result from Zarlink is teaching us. In Zarlink's classifiction there are two main branches to telcom which are consumber and networking. Cosnumber includes cell phone devices, set top boxes etc. Networking includes the standard framing devices, PLLs etc.

It appears that Zarlink's 'consumer' products are not doing well but not doing extremely badly either. The networking products are achieving design wins but few sales. I suppose that this means that the product strategy is well conceived technologically but that the large carrier market has vanished.

Is this an indication of a continuing bandwidh glut in Europe and the US and a newly froming one in Asia. The consumer is fianlly returning to the market but the over capacity from the bubble is still not decreasing.

With the upcoming long haul layoffs at Nortel and the failuree of Zarlink;s networking products, I can see a persuasive argument that the bandwidth bubble is still extant. With the profitablity of PMC and the not too bad performance of Zarlink's consumer division, I see an argument for the acceptance of convergence and a reawakening of the consumer.

Perhaps we will be seeing the long awaited consumner acceptance of converged and netork applications. The perfomance of Cognos and other KM-type companies sems to indcate this.

The wisely procalimed bubble strategy of supply infrastructure in preference to applciations seems to have been shown to be hollow. It is too easy to create an excessive amount of infrastructure and too difficult to create applicaions of customer value for this straegy to succeed. The inverse strategy of concentrating on applicaions and understanding what brings value to these applications seems to be working. If the consumer accepts an applicaion, it will drive the necessary infrastrcuture. The
dljvjbsl 12/4/2012 | 11:19:50 PM
re: Zarlink Loses Its Telecom Nerve With the strong assumption that the bulk of the Zarlink layoffs will occur in Ottawa, the question arises of whether Zarlink will retain its Ottawa offices. It has an American CEO with an American executive team. Its currently successful divisions are concentrated in the UK and Sweden. Why would Zarlink retain its executive team in a locaion so far removed from its successful operations?

I would expect that Zarlink will move its executive offices to California and close the Kanata location.
hitecheer2 12/4/2012 | 11:19:50 PM
re: Zarlink Loses Its Telecom Nerve Any idea where the layoff will happen in Zarlink? Kanata R&D was the team that designed T1/E1, digital PLL, TDM switch etc. Will most of the layoff come from there? The team has alreay been hit hard when Zarlink decided to cancel the DSL product line not very long ago.

BobbyMax 12/4/2012 | 11:19:49 PM
re: Zarlink Loses Its Telecom Nerve It has long been predicted that the telecom industry will not recovereven in ten years. There is no positive indicators for the telecom industry to recover. In fact, more lay offs and company closures are expected.

Unfortunately Zarlink has not closed its multiple locations. Ii is my recommendation that the company close all its US operations and move every thing to Ottawa, Canada. This action would itself save considerable sums of money.

Furthermore the 5% layoffs would not make any difference. It is just cosmetic reduction.
gea 12/4/2012 | 11:19:48 PM
re: Zarlink Loses Its Telecom Nerve BobbyMax:

All your base are belong to us.
salessnake 12/4/2012 | 11:19:45 PM
re: Zarlink Loses Its Telecom Nerve Gea,

Not that I really care, but why do you always rip on the Bobbymax posts?

Ok-maybe he/she does not have the best English skills, but so what? Who has not slipped up in an email from time to time?

I don't want to start a flame war over this, but it just seems a littl over the top.

The great white sales snake.
whyiswhy 12/4/2012 | 11:19:44 PM
re: Zarlink Loses Its Telecom Nerve When fixed voice is free, and VOD is the only app that pays, LH fiber will build again. Telecom will recover in about two years.

Give or take.

Until then, it's survival of the fittest.

Ben Crosby 12/4/2012 | 11:19:27 PM
re: Zarlink Loses Its Telecom Nerve >>>
Not that I really care, but why do you always rip on the Bobbymax posts?

Hmm, I deplore posting responses to such obvious trolling - but; doesn't it occur to you that if "gea" sucessfully posts immediately after every "bobbymax" post, it is more than likely that they are one and the same person ?
gea 12/4/2012 | 11:19:26 PM
re: Zarlink Loses Its Telecom Nerve Salesnake wrote...

"Ok-maybe he/she does not have the best English skills, but so what? Who has not slipped up in an email from time to time?
I don't want to start a flame war over this, but it just seems a littl over the top."

There's a long, LONG history with BobbyMax on these boards. After you live some of it out your conclusion will be the same: He'll slander any endeavor, individual or technology and never NEVER back it up with reasons or facts. In fact, I was the first person he ever responded to via my "BoobySPeaks" series.

No...my posts declare to him and the rest of the world that he can not and should not be taken seriously, nor can he be argued or engaged with. More than that, many of his posts are merely strings of nonsequiturs.

If you don't agree, just wait a year or two. You will.

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