Mosesmann of Prudential goes ga-ga over PMCS's future. Here's his report:
- PMC's leadership position in broadband infrastructure communications chips appears to be accelerating in three key areas: Network Access, Metropolitan Area Networks (MAN), Wide Area Networks (WAN - the core of the Internet).
- We believe PMC excels in the key competitive fronts: enabling rapid time-to-market, function integration, and establishing/driving standards
- PMC is widening its lead through massive R&D expenditures. The company is driving innovation, creating an installed software base, and amassing design wins at an accelerating rate.
- We believe PMC is the premier broadband communication chip company. We reiterate our Strong-Buy rating and $300 12-month price target. What we observed at PMC's technology workshop, held yesterday, underscored our belief that PMC-Sierra is widening its lead as the primary supplier of communication semiconductors used in the equipment that is being deployed to power the Internet. We believe the company's early entry into the communications market and its industry leading gross margins of 80% have allowed the company to amass the largest R&D engine that is focused solely on developing broadband communication solutions. The company's rapid rate of design wins, continually expanding product line, and accelerating revenue growth all point to the fact that PMC-Sierra is the premier semiconductor company in the premier market segment of communications infrastructure, in our opinion. We are reiterating our Strong Buy rating and 12-month price target for PMCS shares of $300.
Demand For Broadband Communication Is Accelerating
The demand for broadband communications infrastructure continues to accelerate. Driven by the Internet, there appears to be an insatiable demand for faster and faster data connections to consumers PCs and soon, connections to their cellular phones. This ever rising bandwidth at the outer edge of the network continues to push the bandwidth capacity limits of the infrastructure where these data paths must be handled simultaneously. To support this needed increase, infrastructure equipment suppliers must continually introduce new products that capitalize on the most current technological developments. Hence, the primary focus of these equipment suppliers is time-to-market for their new designs.
PMC Enables Rapid Time-To-Market, The Industry's New Mantra
PMC is one of the premier suppliers of application specific standard products (ASSPs) for use in broadband communications systems. The company continuously introduces new ASSPs which communication system designers can use as building blocks in their designs. By utilizing PMC's ASSPs, systems designers can avoid the lengthy process of developing their own semiconductors, commonly referred to as ASICs (Application Specific Integrated Circuits). By avoiding the ASIC development, customers can improve their time-to-market by as much as 6 to 18 months. This rapid acceleration of time to market has created significant incentive for customers to utilize more ASSP products, hence, the growth in PMC's available market exceeds the growth of the overall communications equipment market.
Integrate Or Be Integrated - We Expect PMC to Drive Integration
We believe that the broadband communications semiconductor market will be driven by the constant integration of more functions into a smaller number of chips. We believe that suppliers in this space will either drive the integration trend or see their historic markets integrated into the parts of other suppliers. Our expectations are that only those companies that move to compile all of the intellectual property within a communications system will have the wherewithal to win the integration battle. We believe that PMC is well positioned on this front as a result of its continued organic development and aggressive acquisition efforts. We expect that PMC intends to lead the integration charge and that they have the total system knowledge to succeed. We believe the company's recent announcement of its integrated OC-48 framer and physical layer solution (S/UNI-2488) is evidence of the company's
capabilities in this area.
PMC Drives Industry Standards
PMC has been very successful in driving industry standards in our opinion. The company was the first to establish a development group for the broadband communications market. This organization, the SATURN Development Group, consisting of the majority of PMC's key customers, has been very successful at defining standards that are later approved by the "official" standards bodies. Through this effort PMC has accelerated the market growth for its products as a result of interoperability and created a competitive edge by increasing its chances to be first to market with standard compliant solutions. We expect that the company's recently defined Line Card to Switch (LCS) protocol will be the next standard to take this path and significantly benefit PMC.
Customers Investment In Software Development Should Be Competitive Advantage
As ASSP products from companies such as PMC are utilized deeper within communication systems, software routines to run the parts are becoming much more complex. PMC's customers are making significant investments in the development of software to be used in conjunction with the company's components and would much prefer to reuse this investment in future designs. This ever growing installed base of software is rapidly becoming a barrier to PMC's competitors that attempt to win sockets in subsequent system designs. We expect this trend to accelerate.
PMC - The Largest Development Team Focused On Broadband That we Know Of
PMC's estimates that it will have 1400 employees by year end. These employees have one focus, broadband communication semiconductors. This is the largest team we know of focused exclusively on broadband. We believe the company's sheer mass and dedication to investment in R&D continues to widen the gap between itself and its competitors. The company's rate of design wins continues to accelerate with 475 wins reported in the March 2000 quarter up from 325 in the March 1999 quarter. We agree with PMC's assertion that in the end there will be no more than three semiconductor companies that service 80% of the broadband semiconductor market. We are convinced that PMC will be one of those three. |
