June 21, 2001
Communications-Chip Makers
Are Hit Hard by Tech Downturn
By MOLLY WILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
The market for computer chips is bad, with sales expected to tumble 21% this year. That's the good news.
The bad news is that the communications-chip market -- which represents one quarter of the $177 billion overall chip market -- is in even worse shape and there is no sign that it will get better soon. Sales of the chips, which are used in networking gear, could drop as much as 30% this year and may not see any recovery until next year at the earliest, analysts say.
Communications-chip makers "will definitely be hit harder and will take longest to recover," said Bill McClean, president of IC Insights, a research firm in Scottsdale, Ariz. That doesn't bode well for the likes of Broadcom Corp., Applied Micro Circuits Corp., Vitesse Semiconductor and PMC-Sierra Corp.
Intel Corp., the world's largest chip maker, said earlier in June that while its microprocessor business had stabilized, it didn't think it had seen the bottom in its networking-communications business, about 20% of its total.
Makers of communications chips, which are used to speed up data passing through a network, are being hammered because their customers -- and some of their customers' customers -- are flush with billions in inventory that they don't need. As those chips sit on shelves, there is no sign that demand is starting to pick up, analysts said. Even if demand did pick up, it could take the telecommunications carriers, equipment makers and other suppliers months to work through the inventory they have.
Analyst Mark Lipacis, who first downgraded communications chip makers late last year and further cut his investment recommendation earlier this year, said the continued bad news from chip buyers could mean that earnings estimates are still too high for this year and 2002.
Cisco Systems Inc., which buys chips that go into its routers and other equipment, has had to write down $2.2 billion of components that it isn't sure it can sell. JDS Uniphase, whose optical networking components help amplify light waves, expects to write down as much as $250 million in inventory and sees sales dropping 25% in the September quarter.
Companies such as Cisco and Nortel Networks Inc. also may have gotten ahead of themselves in building inventories because last year they were hurt by parts shortages that cost market share and hobbled their ability to supply customers. As a result, some companies entered long-term supply agreements that may have been difficult to ratchet back quickly, analysts said.
Part of the problem for communications-chip makers is that many networking-equipment manufacturers use customized chips, much of which can't be sold to other customers.
Stocks in the sector have been hit hard by the downturn. Broadcom was changing hands at $32.50 in 4 p.m. Nasdaq Stock Market trading Wednesday, up 1.81 on the day but down 88% from a 52-week high of $274.75. Broadcom is now predicting sales in the second quarter will fall as much as 35% from the first quarter and is cutting jobs to cope with the slowdown. Applied Micro was up 57 cents Wednesday in Nasdaq trading at $14.07, but that's a tumble of 88% from its high of $109.75 last Sept. 29; PMC Sierra was up 54 cents at $25.39 on the Nasdaq, a 90% plunge from its high of $246.25 on Sept. 1. Vitesse was off eight cents on the Nasdaq Wednesday at $17.04, and is down 82% from its high of $95.19 reached in late August. |
