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Zarlink Swears by Swirhun

Light Reading
News Analysis
Light Reading
6/28/2005

Times haven't been easy for Zarlink Semiconductor Inc. (NYSE/Toronto: ZL) lately, but if the chip company decides to give up on a business unit, it apparently won't be optical.

The firm today announced the hiring of Stan Swirhun, a founder and former CEO of transceiver vendor Picolight Inc., to run its optical efforts.

Swirhun stepped down as CEO of Picolight last year but remained on the board (see Picolight Names New CEO). Having moved back to Sweden, Swirhun could not be reached for comment today.

Formerly a piece of , Zarlink is best known for telecom chips, particularly in the areas of Sonet transport and pseudowires. But the company also has optoelectronics in its bag, with offerings including transceiver modules, lasers, and Vertical Cavity Surface Emitting Lasers (VCSELs). The latter is familiar ground to Swirhun, who helped found Picolight as a pioneer in VCSEL-based transceivers.

It's been a tumultuous 12 months for Zarlink, the highlight (from a news perspective, anyway) being the abrupt firing of CEO Patrick J. Brockett hours before Zarlink's earnings call in January. "The board of directors was disappointed with the recent financial results and was disappointed with the overall direction that Mr. Brockett had been taking," a Zarlink spokesman told Light Reading at the time (see Zarlink Reports Q3, Names Interim CEO).

Brockett had embarked on an ambitious plan to expand Zarlink's horizons. Networking chips make up half of Zarlink's revenues, but the company is also moving into consumer electronics and ultra-low-power chips, the latter camp including medical sensors that fit inside a pill to be swallowed (see Zarlink Branches Out, and by the way: eewww!).

The plan may have gotten too ambitious, as Zarlink's R&D costs have reached 39 percent of revenues while losses have continued to mount. For the fourth quarter, which ended March 25, Zarlink reported revenues of $48.4 million and losses of $23.9 million, or 19 cents per share (see Zarlink Reports Q4). Subtracting charges related to layoffs, asset impairment, and the like, Zarlink's losses came to 8 cents per share, one penny worse than analysts' expectations, according to Reuters Research.

Zarlink stock closed down 54 cents (25%) at $1.63 the day after Brockett's firing and hasn't recovered, trading at $1.33 earlier today.

Brocket was replaced by vice chairman Kirk Mandy, first on an interim basis, then for good (see Zarlink Appoints New CEO). Mandy hasn't been involved with Zarlink's day-to-day operations, but he's got a long history with the company. Mandy was the vice president in charge of Mitel Semiconductor -- the outfit that would become Zarlink -- in the mid 90s, and he was president of Mitel Networks Corp. from 1998 to 2001.

Zarlink announced a restructuring plan in February, pledging to cut the R&D programs that weren't already generating revenue and to reduce headcount to 870 from 1,020.

Analysts like the sound of that but aren't giving Zarlink a gold star yet. "We remain cautious given the numerous moving parts associated with [Zarlink's] strategic vision and the potential weakness in the distribution channel," wrote analyst Sandy Harrison of Pacific Growth Equities Inc. in a report last month.

What else might be in store? A sale of one of Zarlink's businesses might make sense, according to analyst Allan Mishan of CIBC World Markets. "We think management will pursue more significant changes, including potential business line sales. A prime candidate would be the consumer business, which could interest digital TV players," Mishan wrote in a report last month.

— Craig Matsumoto, Senior Editor, Light Reading

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