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Applied Micro shares ride optical wave

Shares of chipmaker Applied Micro Circuits rose more than 10 percent after the company beat estimates for the third quarter and increased financial targets for the fourth.

Shares of Applied Micro Circuits on Wednesday rose more than 10 percent after the company surpassed expectations for the third quarter and increased financial targets for the fourth quarter.

The company's positive news prompted Goldman Sachs to raise earnings estimates Wednesday. Analyst Nathaniel Cohn said Applied Micro will remain on Goldman's "recommended list," and he raised his estimate for 2001 to 57 cents per share from 53 cents. For 2002, Cohn raised estimates to 81 cents per share from 72 cents.

Other analysts reiterated their ratings for the stock. Banc of America Securities analyst Alex Gauna reiterated his "strong buy" position, as did CE Unterberg Towbin analyst Karl K. Motey. Motey also holds a $100 price target for Applied Micro stock.

During Tuesday's conference call, Chief Executive Dave Rickey told analysts to expect revenue growth for the fourth quarter in the high teens to 20 percent, up from $150 million in revenue for the third quarter. The $150 million includes revenue from the company's recent acquisition of MMC Networks. Analysts were predicting revenue of $146.7 million, according to First Call.

In August, Applied Micro acquired MMC Networks in a stock deal valued at $4.5 billion. At the time, the company said the merger would help it provide a complete line of products for the optical networking market as well as expand into new markets for high-speed networks. Sunnyvale, Calif.-based MMC builds computer network processors and communications management technology.

"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 the market close Tuesday, Applied Micro reported earnings excluding special charges of $48.1 million, or 16 cents per share. A consensus of analysts polled by First Call expected the maker of optical chips to earn 14 cents per share. Including charges, Applied Micro lost $269.5 million, or 95 cents per share, for the third quarter.

Applied Micro executives on the conference call said they were confident the company could overcome an industry slowdown. The company said that more than two-thirds of Applied Micro's revenue comes from chips that are used in some of the fastest growing areas of optical networking--a market that grew 90 percent in 2000.

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

Applied Micro's main competition at the moment isn't other chipmakers, 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, competitors such as PMC Sierra and Broadcom don't have as many product offerings as Applied Micro.

"Applied Micro 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 expect a return to the company's usual pattern of sequential growth rates in the 10-percent to 15-percent range for quarters beyond March.

He predicted a fourth-quarter gross margin in the 75 percent range. Sales, general and administrative expenses should consume about 14 percent of revenue, he added. 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 Goldman Sachs analyst Nathaniel Cohn. "Despite macroeconomic concerns, the company has very good near-term visibility."