March 13, 2001
PMC-Sierra's Chairman Plans to Stick
To Strategy Despite Drop in Share Price
By Tamsin Carlisle
Staff Reporter of The Wall Street Journal
BURNABY, British Columbia -- Not many companies can match the roller-coaster ride of PMC-Sierra Inc.
The Internet chip designer, an obscure upstart only a few years ago, had a market capitalization of $43 billion by early 2000, the highest of any company in Canada except Nortel Networks Corp. In the 12 months through March 2000 alone, its stock price multiplied by 15.
But now, its stock is down 88% from its March 10, 2000, peak of $255.50. In a single grisly trading session in late January, investors wiped out $3.5 billion of the company's equity value. PMC shares fell to $31.63 in Nasdaq Stock Market trading at 4 p.m. Monday, putting the company's market cap at $5.1 billion.
Still, Robert Bailey, PMC's chairman and president, says he plans to stick with exactly the same basic strategy he has used all along. Convinced that PMC's problems are short term, he predicts the company will work off excess inventory within a few months and will see revenue start to rise by the third quarter. The company's main response to the current crisis will be to trim expenses and curb the increase in research-and-development spending.
PMC remains solidly profitable, Mr. Bailey says. But its stock plunged in late January, when the company predicted that first-quarter revenue would decline 30% from the previous quarter. The company expects first-quarter earnings to drop to between 13 cents and 15 cents a share from 26 cents a share in the fourth quarter of 2000. The company said its customers -- suppliers of Internet equipment to telecommunications carriers -- had been caught off guard by their own clients' deep capital-spending cuts and were glutted with inventory. Eight of PMC's 10 top customers canceled orders for semiconductor components, PMC said.
The stunning revenue prediction, following eight quarters of sequential revenue growth for PMC, was an early sign of trouble in the broader field. Last month, two big PMC customers, Internet equipment maker Cisco Systems Corp. of San Jose, Calif., and Nortel, separately warned of rising inventories and sagging revenue prospects. Cisco alone accounts for more than 25% of PMC's sales, and its warning sent PMC shares plunging 12% in a single day.
Faced with the grim circumstances, PMC plans to reduce spending on acquisitions and will hire fewer staff this year, Mr. Bailey says. But even now, he doesn't completely rule out further acquisitions in coming months. The company last year completed seven corporate acquisitions, mostly paid for with stock.
PMC also will increase this year's research-and-development spending by only 10% to 20% from last year, Mr. Bailey says. Last year, PMC nearly tripled the previous year's R&D spending.
As in the past, research spending will focus narrowly on new products "to make the Internet run faster," Mr. Bailey says. Though PMC excels in system-design capability and in products for processing complex data streams, other companies sell faster chips, says Ray Rund, a fund manager with Shaker Investments, New York. Thus, PMC needs to focus on higher processing speeds to stay competitive, Mr. Rund says.
PMC is sticking with this basic strategy because it thinks the appetite of Internet users for faster delivery of more-complex data will remain keen for years to come, Mr. Bailey says. Despite brisk competition, selling proprietary technology to help make the Internet run faster is still one of the highest-margin niches in the semiconductor industry, he adds.
For 2001, PMC projects "modest" revenue growth of 30%, from $694.7 million for 2000; it hasn't forecast earnings. A First Call/Thomson Financial consensus of analysts calls for 2001 profit of 80 cents a share; PMC posted net income of $75.3 million, or 41 cents a diluted share, last year, down from $90 million, or 60 cents a share, in 1999.
While some investors have bailed out, others are sticking with the company. Mr. Rund of Shaker Investments says he was on the verge of dumping his PMC position in late January but decided the company's business model was sound. Further expansion of PMC's market ultimately depends on people wanting to communicate with each other over the Internet in more sophisticated ways, he says. "I don't see anything that suggests people are going to want to communicate less." he adds. |
