RE: IBD
Date :03/20/2000
Author :James DeTar
PMC-Sierra Takes In View From Chip Industry?s Peak
CEO and president
42 years old
B.S., electrical engineering, University of Bridgeport, Conn.; MBA, University of Dallas
PMC Exec Sees Return Of
Semi Stock Glory Days
Stocks of telecommunications chip makers have rocketed this year, and PMC-Sierra Inc. was leading the charge until a dip in recent days as part of a general tech-stock slide. Shares of Burnaby, British Columbia-based PMC-Sierra more than tripled, to 255 on March 10 from 75 on Jan. 7. They nowtrade at about 208. Investor's Business Daily gives the company a Relative Price Strength rating of 97. RS rates price performance in the past 12 months. A 97 puts it in the top 3%.
PMC-Sierra sells to all of the large telecom gear makers, including Cisco Systems Inc. and Nortel Networks Corp.
The company said fourth-quarter revenue rose 80% to $81 million. Per-share earnings rose 67% to 15 cents.
Chief Executive Robert Bailey recently spoke with IBD about the stock market shift that's putting semiconductor in the spotlight.
IBD: What's the outlook for telecom chipmakers this year?
Bailey: It's going to be a banner year for semiconductor makers that service the communications sector, especially in the area of broadband, which includes DSL (digital subscriber line), cable modems, and routers and switches for the Internet.
Billions of dollars are being spent by Internet service providers. And AT&T and MCI WorldCom are trying to deploy Internet lines. CLECs (competitive local exchange carriers) like Northpoint Communications and Covad are attacking the ILECs (incumbent local exchange carriers, the regional Bells).
Then you have Quest Telecom and Global Crossing attacking the long-distance carriers. And they're all doing it with broadband technology. As a result of this arms race among the service providers, we're seeing record revenue and accelerating demand for equipment that our customers - Cisco, Nortel, Lucent and others - provide.
IBD: The telecom market has been hot for a while, though. Why have telecom chip stock prices shot up so suddenly?
Bailey: A lot of money is slowly but surely leaking out of the Internet dot-com stocks. Fund managers that want to stay invested in the Internet and the Web are thinking in terms of companies that build the infrastructure, providing the so-called picks and shovels of this gold rush called the Internet. And our revenues are accelerating. PMC has the highest gross margins in the entire semiconductor industry right now (81% for 1999, which Robertson Stephens says is highest). The safe way to play (Internet-related stocks) is through infrastructure.
IBD: What could derail growth?
Bailey: The only things that come to mind are the typical macro things. There are those in the political world that want to tax anything that moves. Taxing the Internet would put a big wet blanket over what is becoming one of the largest revenue generators.
IBD: Chip manufacturing capacity is starting to get tight. How will this affect PMC-Sierra and its rivals?
Bailey: The amount of semiconductors that the communications companies consume is still a minority of the total. It's my opinion that (communications chips) are a priority for (chipmaking) fabs. Merchant market as well as captive (company-owned) fabs are making way for communications wafers at the expense of consumer devices and PCs. IBD: Could a capacity shortage occur?
Bailey: Supposedly there are already some shortages in flash memory (memory chips for some cell phones and other products). As manufacturing companies respond, it could be a short-term issue. The issue is how to manage our forecasts and capacity and commitment to customers. But (any manufacturing shortage) is not going to slow down fundamental demand for communications ICs.
IBD: How closely tied is PMC's future to gearmakers like Cisco and Nortel?
Bailey: Very closely. We'll be as successful as they are, in total. We're a bit insulated though. If one of them has problems due to competitive issues, we're insulated because we supply the other competitor.
IBD: There's been consolidation in the telecom-chip arena: Intel Corp.'s purchases of Level One Communications and DSP Communications. Do you think that will continue? Bailey: I expect there's going to be some consolidation. Dozens of start-ups and a lot of companies that have never been in communications are desperately trying to retool to be communications companies.
It's getting to a point where it's very difficult to be the next PMC or (PMC rival) Broadcom. This is the consolidation I'm talking about. There will be no more than two or three bona fide broadband suppliers within the next three to five years. |
