PMC and Cisco feel the pain

PMC posted strong fourth-quarter earnings but said revenue will grow 30 percent in fiscal year 2001. Revenue more than doubled this past year to $695 million from $296 million in 1999.

Traders hammered shares of PMC-Sierra, which closed down $21.88, or almost 23 percent, at $74 on a volume of almost 46.4 million shares, more than four times the stock's average daily volume of about 10.4 million shares. Cisco fell 94 cents to $38.38.

The chief issue is demand, and the lack of it. PMC-Sierra said orders fell during the quarter, shown by a book-to-bill ratio of less than 1-to-1, which means that the company shipped more product than it received in new orders.

The chief suspect is networking equipment giant Cisco, which makes up 25 percent to 30 percent of PMC-Sierra's sales.

Cisco decided to stockpile its inventory with components to combat shortages because its suppliers, like PMC-Sierra, could not keep up with the surging demand over the past year.

Yet demand has cooled considerably over the past few months, leaving Cisco with a large inventory it needed to shrink before it bought more components, which translates into fewer orders from suppliers and a whack on the future revenue growth of PMC-Sierra.

UBS Warburg analyst Nikos Theodosopoulos lowered sequential revenue growth estimates for Cisco on Friday for the April and July quarters to 2 percent and 4 percent from previous estimates of 5.5 percent growth for both quarters. He also whittled his earnings estimate for fiscal year 2001 to 76 cents a share from 77 cents.

"We believe Cisco is taking some precautionary expense-control measures heading into the April quarter," he wrote in a report. "This makes us believe that Cisco is preparing itself for a challenging April quarter."

The outlook for PMC-Sierra's first quarter was similarly less than clear. The Campbell, Calif.-based company told analysts to expect revenue between $160 million and $170 million and earnings in a range of 13 cents to 15 cents a share.

Analysts surveyed by First Call expect PMC-Sierra to make 37 cents a share and revenue of $257 million.

The company posted a solid fourth quarter, which gave investors some good news. It earned a pro forma net income of $62.5 million, or 34 cents a share, on sales of $231.7 million. For the same quarter last year, PMC-Sierra earned a pro forma income of $19.3 million, or 11 cents a share, on sales of $87.6 million.

Wall Street expected the company to earn 34 cents a share on sales of $228.6 million, the consensus estimate of analysts surveyed by First Call.

Naming the problem
"PMC certainly has had problems beyond what anyone else is experiencing," said Rick Faust, a principal at Adams, Harkness & Hill.

Faust says that PMC-Sierra disclosed in the earnings conference call Thursday that about 10 percent of its products were introduced within the last two years, which means a large majority of the company's products are older and used in legacy systems that will be replaced.

Faust says that about half of PMC-Sierra competitor Applied Micro Circuits' products were introduced within the last two years. This revenue mix potentially means stronger sales growth for AMC as more companies adopt the newer systems and replace the older ones.

Another problem, according to Faust, is PMC-Sierra's reliance on making chips for DSL (digital subscriber line) equipment.

The downturn in the financial markets has caused a cash crunch for many companies. The situation has forced local phone companies to cut back on capital equipment spending, which has hit the DSL equipment makers and their suppliers, such as PMC-Sierra, hard.

Staff writer Tiffany Kary contributed to this report.