CNET también está disponible en español.

Ir a español

Don't show this again

Mobile

Telecom slump challenges PMC

The company, one of the biggest success stories of the recent communications industry boom, faces tough times this year along with competitors.

    PMC-Sierra, one of the biggest success stories of the recent communications industry boom, will face tough times this year along with competitors.

    An overall slowdown in the U.S. economy has hit the networking chipmaker and its competitors from many angles. On one end, the slump has caused telecommunications carriers like WorldCom, Qwest Communications International and AT&T to buy less equipment from PMC customers such as Cisco Systems and Lucent Technologies, who then buy less from PMC.

    "By far, the overall demand issue and the inventory buildup at their customers and their customers' customers is (PMC's) biggest challenge," said Jeff Rosenberg, an analyst at William, Blair & Co., an equity research and brokerage company.

    PMC grew its revenue to about $695 million in 2000 from $296 million the previous year, an increase of 135 percent. As a result, its stock was at a 52-week high of $255.50 last March. It now trades in the low $30's.

    Scott Randall, a managing director at Wit SoundView thinks PMC's revenue will grow just 9.8 percent this year. "It's going to be very difficult to replicate the growth they had in 2000," he said.

    PMC was downgraded to "outperform" by Salomon Smith Barney on Monday. It has also been caught in the maelstrom on the Nasdaq led by Cisco, which is trading at two-year lows.

    Higher inventory levels at PMC's customers have also slowed orders even more, and put PMC and other chipmakers such as JDS Uniphase and Broadcom into a deeper hole because their customers will have to use up stockpiled inventory before submitting more orders for parts.

    Inventory has ballooned over the past few months. Cisco Systems, which comprises about 25 percent of PMC's revenue, reported inventory of $2.53 billion for its fiscal second quarter ending Jan. 28, 2001. That compares with fiscal first-quarter inventory of $1.96 billion for the quarter ending Oct. 28, and $1.23 billion in the quarter ending July 29.

    But some analysts believe inventory is not the whole issue and point the finger at overall demand.

    "Inventory builds up when things slow down. It's more of a consequence than a cause," said Jeremey Donovan, a principle analyst at industry consultants Gartner Dataquest.

    Donovan also thinks slower sales of PCs have squeezed growth in the communications chip sector. The PC is the mainstay of how people access the Internet. If growth slows with PCs, that dampens the need for communications infrastructure needed by makers of PC-related products like DSL (digital subscriber line) modems, which have propelled part of PMC's business.

    Donovan says this low-end squeeze from PC-related products has combined with a slowdown on the high end with sales of telecom equipment to make things look grim for the sector.

    It's a slump some people think will take a long time to turn around. Wall Street analysts think demand in the industry will accelerate late in the year. Others think the whole year is botched.

    "The pick-up is very unlikely to happen in the middle of the year," said Donovan.

    Despite a possible slow journey out of the economic morass, analysts believe PMC's wide array of products will help pull it through, because the company does not depend on any single technology to pay the bills.

    Also, even though the company's dependence on revenue from Cisco makes it vulnerable, PMC is not the only communications chipmaker that depends on some fat accounts. For example, about half of Broadcom's revenue comes from three customers--3Com, Cisco, and Motorola--which have been hit by the slump as well. Another rival, JDS, lists Nortel Networks and Cisco among its largest customers.

    PMC's niche in the marketplace may also help it weather the financial slowdown. Among its businesses, the company makes chips for equipment in metropolitan optical networks, which are networks in urban areas, as opposed to long-haul networks, which send data between cites.

    A recent study indicates that even though the metro market is smaller, it will grow about twice as fast, which should pump up PMC's sales once the slump ends.

    In the meantime, PMC may have to attack just to hold its ground, and cut prices. "It's still a competitive market with a lot of suppliers selling similar parts, so I would expect some aggressive pricing in this environment," said Joseph Byrne, another chip analyst at Gartner Dataquest.