PMC-Sierra shares collapse on 1Q, 2001 outlook

Communications chipmaker PMC-Sierra met analysts’ estimates in its fourth quarter Thursday but said a severe inventory correction and slumping orders from major telecommunications carriers will result in lower sales and earnings in the first quarter and fiscal 2001.

According to Chief Financial Officer John Sullivan, orders came to a screeching halt in the second half of the quarter when its largest customers, such as Lucent Technologies (NYSE: LU), Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE: NT), either canceled or delayed orders for the first quarter.

“We experienced book-to-bill ratios below 1:1 in all our product categories this quarter,” Sullivan said during Thursday’s conference call. “We believe we’re in the midst of a severe but temporary inventory correction.”

PMC-Sierra (Nasdaq: PMCS) shares closed off $7.25 to $95.88 ahead of the earnings report but tumbled to $65.38 in after-hours trading.

Sullivan told analyst to expect sales of between $160 million and $170 million in the first quarter and earnings of between 13 cents a share and 15 cents a share, well below current analyst estimates.

First Call Corp. consensus was expecting first-quarter sales of $257 million and earnings of 37 cents a share.

Chief Executive Officer Robert Bailey said the company expects the inventory glut to clear up “sometime in the first half” of 2001 but advised analysts to expect sales growth of only 30 percent for the fiscal year.

The dreary outlook overshadowed an otherwise solid fourth-quarter earnings report.

In the quarter, it earned $62.5 million, or 34 cents a share, on sales of $231.7 million.

First Call Corp. consensus expected the company to earn 34 cents a share on sales of $228.6 million.

The $231.7 million in sales marks a 152 percent jump from the year-ago quarter when it pocketed $19.3 million, or 11 cents a share, on sales of $87.6 million.

For the fiscal year, PMC-Sierra earned $179.4 million, or 99 cents a share, excluding charges, on sales of $694.7 million, up 135 percent from fiscal 1999 when it made $56.6 million, or 35 cents a share, on sales of $295.8 million.

Sullivan said that while North American orders evaporated in the second half of the fourth quarter, European and Asian customers picked up the pace.

“Customers in China expect to increase their capital expenditures by 50 percent this year and will contribute more than $100 million to our revenue total this year,” he said. “We expect that sales into Asia and Europe will outgrow growth in North America in 2001.”

Company executives said sales should grow 8 percent to 12 percent sequentially once the inventory issue is resolved.

Gross profit margins in the quarter came in at 75.1 percent, well below most analysts’ estimates.

“PMC-Sierra is in a good position to fight through this downturn,” said Sandy Harrison, an analyst at Pacific Growth Securities. “A lot of companies are facing these issues. It’s just a matter of what degree.”

Ahead of the earnings report, Harrison pegged PMC-Sierra for a profit of 33 cents a share on sales of $230 million. He expected the company to post gross profit margins of 77 percent.

Bailey said the uncertain economic climate would likely result in a tapering of the company’s aggressive merger and acquisition strategy.

“I’d say we’ll be less inquisitive on this front,” he said. “We’re going to focus more on integrating all of our previous mergers.”

Charles Willhoit, an analyst at J.P. Morgan, said the stock was beginning to “look interesting” at its current price assuming it was growing sales at more than 40 percent a year.

The stock was trading at around 57 times its projected fiscal 2001 earnings and a price-to-earnings ratio of 215. Those figures undoubtedly will be reduced in the coming weeks.

Last quarter, PMC-Sierra easily topped analysts’ estimates when it returned a profit of $56 million, or 31 cents a share, on sales of $198.1 million.

Its shares raced up to a 52-week high of $255.50 in March before falling to a low of $57.75 earlier this month.

Twenty-one of the 23 analysts following the stock maintain either a “buy” or “strong buy” recommendation.