For bruised US chipmakers, telecom sector hurts the most

Duncan Martell

SAN FRANCISCO: The chairman and founder of specialty chipmaker LSI Logic

Corp. has a simple explanation for the recent violent downturn of the

notoriously boom-and-bust $210 billion semiconductor business. "It's not

like the companies have the wrong products or they're being crushed by

competition or by some disruptive technology," said Wilf Corrigan, a

33-year-veteran of the business. "It's just that their customers have gone

to sleep and the question is how quickly does all this correct itself."

The damage to sales, profits and stock prices is far and wide as their

customers work through glutted inventories. The Phildelphia Stock Exchange

semiconductor index, a proxy for the sector, stands at less than half its record

high of 1362.10 hit on March 14, 2000.

But it is most severe for firms making microchips for the telecoms and

communications industries - semiconductors that help power routers, switches,

optical gear, cell phones and the like. The current downturn, the most

pronounced since 1985 when there was genuine concern that Intel Corp might be

run out of business by Japanese memory chip makers, now shows some signs of

spreading to European markets.*

And while some companies, most notably Intel, have said that the bottom is at

hand, the consensus for a rebound in sales for communications chipmakers is

still murky. Whatever consensus there is, focuses on a rebound beginning late in

the third quarter and strengthening in the fourth.

Large networking firms, such as world No.1 Cisco Systems Inc., are either

writing down billions in inventory or burning through it the best they can

before ordering new chips from suppliers. Those suppliers include companies such

as LSI Logic, Broadcom Corp., Texas Instruments Inc. PMC Sierra Corp. Applied

Micro Circuits Corp., Vitesse Semiconductor Corp. and RF Micro Devices Inc.

Demand seen back near year-end



"We are well positioned for a re-acceleration of demand which could
come toward the end of this year," communications chipmaker Broadcom

Corp.'s chief executive Henry Nicholas told investors on Monday at the J P

Morgan H&Q Technology conference. He was referring to new products and

markets that will likely spur sales.

But Nicholas' comments squared with LSI's Corrigan's. "What we've seen

here is the first big correction of inventory in the first quarter and there

will be more in the second quarter, but by the time we get to the third quarter,

you'll find some companies starting to see some daylight," Corrigan said.

Irvine, Calif.-based Broadcom, whose Q1 profit fell by almost half, now

expects to post a second-quarter loss before special items of between seven

cents a share and nine cents. Before that warning, the consensus analyst

estimate was for six cents.

While some communications chipmakers, such as Broadcom and PMC Sierra now say

they can at least see the bottom, others are still mired in a bog of uncertain

demand. "Demand remains very unclear as we go forward," Thomas

Engibous, chief executive of No 1 mobile phone chipmaker Texas Instruments Inc.,

told institutional investors at the JP Morgan H&Q technology conference on

Monday.

The Dallas-based chipmaker also said it hasn't seen any significant change in

demand or improvement in visibility since it reported first-quarter results

almost two weeks ago. "There is no change to our outlook," Engibous

told investors. San Diego-based Applied Micro Circuits, a maker of networking

chips, didn't fare much better when it reported fourth-quarter results last

week. It missed analysts' and its own revenue forecasts and said it sees

first-quarter sales of $70 million to $85 million - as much as 42 percent below

fourth-quarter levels - and per-share profits of two cents.

Boatloads of inventory



More than sagging economic growth, what's hitting communications chipmakers
hardest now are the boatloads of inventory sitting on shelves and on those of

their customers. Cisco said on April 16, that it would write off a staggering

$2.5 billion in inventory to work down bloated inventories. In fact, a good

portion of that inventory may well be obsolete by the time demand snaps back.

Also bruised by a slowdown in telco spending, No 1 supplier of fiber-optic

components JDS Uniphase Corp. which last week posted a $1.3 billion

third-quarter loss and now plans to cut some 5,000 jobs, or 20 per cent of its

work force.

Part of the problem, industry veterans said, is that many of the networking

firms, such as Foundry Networks Inc., Extreme Networks and, even to a certain

extent, Cisco, haven't been through many, if even a single, semiconductor

cycles, leading to a false sense of security. "This is really the first

cycle for a lot of these newer (telco) companies," Corrigan said. "But

the computer companies have been through a lot of cycles and many of these

people have lots of scars."

(C) Reuters Limited 2001.