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Vitesse makes outsourcing design deal

Microchip engineering company Tality will collaborate with Vitesse on how its chips are assembled and manufactured.

Microchip engineering company Tality announced Monday that it will help Vitesse Semiconductor design its communication chips.

Under the terms of the two-year, $34 million deal, Tality will collaborate with Vitesse on how its chips are assembled and manufactured. The chips will eventually be used in routers and switches made by Vitesse customers such as Lucent, Cisco Systems and Alcatel.

Tality, a wholly owned subsidiary of Cadence Design Systems, provides outsourcing services to help companies design electronic systems.

"This is a fairly significant deal," said Garo Toomajanian, a research analyst at Dain Rauscher Wessels, adding that the deal makes up a sizable chunk of the company's potential revenue.

Tality generated about $198 million in revenue last year, and CEO Bob Wiederhold says that about 30 percent of the company's revenue came from "network infrastructure" deals like the Vitesse agreement.

"This is our biggest deal with a semiconductor company," Wiederhold said.

Toomajanian says that the outsourcing of design services is still a relatively small business in the chip industry, but that design companies enjoy some advantages in the notoriously feast-or-famine business.

"During semiconductor downturns, companies do not typically cut R&D spending," he said, adding that chipmakers need to always develop and design new chips to make sure they stay current and keep their manufacturing plants operating as much as possible.

Toomanjanian also believes the shortage of chip engineers coming out of school will continue, which will maintain the demand for his company's services.

But all has not been smooth for San Jose, Calif.-based Tality, which postponed its IPO in October because of gloomy market conditions. Wiederhold said the company would wait until the markets improve before making any further decisions, but declined to speculate on when that might happen.