Applied Micro, PMC-Sierra slide on downgrades

The two communications chipmakers fall after downgrades illustrate that their outlook has worsened over the past few weeks.

3 min read
Applied Micro Circuits and PMC-Sierra both fell Tuesday after an analyst said the outlook for the communications chipmakers has worsened over the past few weeks.

Credit Suisse First Boston analyst Charles Glavin lowered his rating on PMC-Sierra from "buy" to "hold" and cut Applied Micro to "buy" from "strong buy," citing a weak outlook for orders in the March and June quarters.

Shares in Applied Micro, which makes chips for optical networks, were down $5.56 to $38.25. The stock took a tumble earlier in February when the company reiterated its outlook for the next two quarters, but said that it was "on alert" for further order cancellations.

Competitor PMC-Sierra, down $4.44 to $48.06, had also already cautioned that a severe inventory correction and slumping orders from telecommunications carriers would dent sales and earnings.

Glavin also lowered estimates on TranSwitch, down $3.31 to $30.81, and Vitesse, down $7.31 to $55.18, on similar concerns, but only lowered ratings for Applied Micro and PMC-Sierra.

Glavin's main concern was that industry checks with OEMs (original equipment manufacturers) have confirmed that visibility is not improving and that cancellations, first reported at PMC-Sierra and then confirmed by Applied Micro, have actually increased over the past two to three weeks.

Continuing cancellations have increased the possibility that these companies will miss estimates, and it is now "prudent to lower the bar in advance of any potential revisions," he said.

The expected downturn in spending by service providers in the wireline industry also puts these companies' prospects at risk. CSFBdirect analyst Jim Parmelee lowered his service-provider capital-spending estimate to 4 percent from 15 percent, which had already been decreased from 20 percent in December.

The difficulties could even drag on beyond the next quarter. Cisco said its inventories will continue to increase through the third quarter, and Nortel believes that the slowdown is likely to extend into the fourth quarter.

These issues affect communications chipmakers across the board, but PMC-Sierra is slightly worse off as it's been caught in a product transition by its customers, said Glavin, who noted that some OEMs have been actively canceling product orders.

Glavin lowered his calendar year 2001 earnings estimate for PMC-Sierra to 69 cents a share from 88 cents a share, and sliced his revenue estimate to $718 million from $764 million. Glavin's 12-month price target is $55 a share.

The analyst said he remains positive on PMC's long-term strategic position and said he's waiting for certain catalysts to materialize, such as a rebound of bookings, an accelerated ramp of new products, an improvement in service-provider spending or better execution at its largest customers.

Glavin was also extremely bullish on long-term prospects for Applied Micro. The company "remains one of our favorite names in our universe and we note that we believe the rating revision is a temporary situation owing to industry fundamentals and not reflective of any execution issues on the part of the company," he wrote.

Lehman Brothers analyst Arnab Chanda also reduced estimates for Applied Micro Tuesday based on the optical slowdown.

Chanda reduced estimates "based on poor and deteriorating near-term visibility." The analyst now expects calendar 2001 revenue to be $674 million, down from $828 million, and earnings to be 64 cents a share, down from 75 cents a share.