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Applied Micro gains on strong 4Q outlook

Shares of Applied Micro Circuits (Nasdaq: AMCC) jumped after the company hurdled third quarter expectations and boosted targets for the following quarter.

Shares were up 12 percent, or 8.19 to 78.56.

The company's stellar quarter and fourth quarter outlook prompted Goldman Sachs to raise estimates Wednesday; analyst Nathaniel Cohn kept the stock on Goldman's "recommended list" and raised his estimate for 2001 to 57 cents from 53 cents a share, and for 2002 to 81 cents from 72 cents a share.

Other analyss reiterated ratings; analyst Alex Gauna at Banc of America Securities reiterated a "strong buy," as did analyst Karl K. Motey at CE Unterberg Towbin, who also had a $100 price target on the stock.

In a Tuesday afternoon conference call, Applied Micro CEO Dave Rickey told analysts to expect fourth quarter growth in the high teens, and maybe near 20 percent, from the $150 million in third quarter revenue generated by the combined Applied Micro and recently-acquired MMC Networks.

That implies sales approaching $180 million for the March quarter. Analysts were predicting revenue of $146.7 million, according to First Call.

"Our demand has remained strong," Rickey told analysts. "I have no tangible evidence that our overall demand run rate is going to slow down except the obvious macroeconomic concerns and my own ever present paranoia."

After market close Tuesday, the maker of chips for optical networking reported fiscal third quarter net income of $48.1 million, or 16 cents per share, excluding special charges. Analyst consensus predicted a profit of 14 cents per share on revenue of $130.3 million, according to earnings tracking firm First Call.

Third quarter revenue increased 48 percent sequentially and 213 percent year-over-year to $143.3 million, excluding MMC Networks' revenue prior to the acquisition's closing on Oct. 25. If MMC's full third quarter results are included, the combined company generated sales of $150 million.

Shares of Applied Micro rose to 75.25 in afterhours activity on the Island electronic communications network, immediately following the release of third quarter results. Applied Micro stock fell 1.25 to 70.375 in Tuesday's regular trading ahead of the earnings report.

Applied Micro executives on the conference call cited four reasons why the company can overcome an industry and overall economic slowdown because:

  • The company targets the right field.
  • More than two thirds of Applied Micro's revenue comes from chips used for the fastest growing areas of optical networking, such as long haul transport, optical routers and other devices that rest at the center of networks. The optical core equipment industry grew 90 percent in calendar 2000.

  • A shift to faster devices.
  • An increasing portion of Applied Micro's chips are going into units for higher bandwidth uses, such as OC-192 networks. That generates more revenue per network port.

  • More services per port.
  • Network devices are becoming more complex. New features generate more revenue for Applied Micro.

  • Market gains.
  • The company expects to continue taking market share from competitors.

"It's continued strength," said Peter Andrew, analyst with A.G. Edwards. "AMCC is a very conservative company playing in an aggressive space."

Applied Micro's main competition at the moment isn't other chip makers, but rather the in-house manufacturing of the network equipment vendors that Applied Micro serves, Andrew said. As those equipment makers increase their reliance on subcontractors, many chip companies will get a boost, Andrew said. However, he added, others such as PMC-Sierra (Nasdaq: PMCS) and Broadcom (Nasdaq: BRCM) don't have as many offerings as Applied Micro.

"And AMCC is the best-positioned company to benefit from this trend towards outsourcing because they have the broadest product line," Andrew said.

Rickey told analysts to look for Applied Micro to return to its usual pattern of sequential growth rates in the 10 to 15 percent range for quarters beyond March.

He predicted fourth quarter gross margin in the 75 percent range, and sales, general and administrative expenses consuming about 14 percent of revenue. Those figures are within the company's historical norms. Research and development costs will be 22 percent of revenue, Rickey said.

"The guidance is quite solid," said Nathaniel Cohn, analyst with Goldman Sachs. "Despite macroeconomic concerns, the company has very good near-term visibility."

Applied Micro's communication business increased 37 percent for the company's core business and 34 percent including a full quarter's results from the MMC. Communication book-to-bill was 1.33 for the quarter.

Non-communications revenue fell to $12.5 million from $16.6 million in the previous quarter.

New products such as 10-gigabit and framer layer offerings fueled much of the communications growth. "Applied Micro has a very fresh revenue stream which likely signifies less inventory build-up, since those products are just on the cusp of their ramp," Goldman Sachs' Cohn said.

The Applied Micro report provided a much-needed rosy outlook, A.G. Edwards' Andrew said.

"It was good news not only for AMCC, but for the overall space," Andrew said. "It's nice to finally hear someone do what they say they're going to do."

Including charges related to acquired in-process R&D, amortization and stock compensation, Applied Micro in the third quarter lost $269.5 million, or 95 cents per share.

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