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