Interview w/ Bob Bailey...link at the bottom. -Jay
One-On-One with PMC-Sierra's Bob Bailey
By Ed Sperling -- 12/9/2002 6:46:00 PM
Robert Bailey, chairman and CEO of PMC-Sierra Inc., sat down with Electronic News to talk about how he is repositioning his company, when the economy will turn and how the next computing model will be entirely fabless. What follows are excerpts of that interview.
Electronic News: How’s business?
Bailey: Business is stable, but it could be better. We’re still living through the telecom meltdown.
Electronic News: Is there any relief in sight?
Bailey: From the fourth quarter of 2000 to the fourth quarter of 2001, our revenue dropped from $232 million to $47 million. When I was getting my Masters degree in business and they said how to deal with an 80 percent drop in revenue, I must have missed that class.
Electronic News: But you’ve been making cuts since then, right?
Bailey: In January 2001, we were one of the first companies to announce that things were not good and that they would get worse. My peers said, ‘Don’t worry, things will improve.’ We were the first to have layoffs in March 2001, when we cut 230 people, or about 17 percent of our staff. We had to do it again in October. All told, we cut about a third of our workforce. My peers are doing it now. But this enabled us to get focus.
Electronic News: So how solid is PMC’s footing these days?
Bailey: We’re still losing money, but we’re losing a much smaller amount.
Electronic News: When do you expect to return to profitability.
Bailey: I’m not allowed to talk about these things because we’re a public company. But I’m hoping we return to profitability next year. We have excellent customer relationships and we’re getting new design wins.
Electronic News: You mentioned the telecommunications market. What’s the problem there?
Bailey: There are about 15 purchasers who make up about 80 percent of the market. When one decides to increase capital expenditures, they all do it. When one cuts, they all do it. The cycles in that market are radical, almost violent.
Electronic News: But like everyone else who plays in this space, you’re diversifying. What are your new areas of focus?
Bailey: Enterprise and storage. We make the number one processor for laser printers and for Cisco LAN switches. There’s also a new bottleneck in the enterprise, network storage. The industry built all the big pipes. Now it’s a question of getting access to Web pages and massive files quickly. That means a higher-speed physical layer and architectural changes like attached storage.
Electronic News: So you’re cashing in on the Internet phenomenon?
Bailey: Right. But there was a myth that drove the last investment cycle that Internet traffic was doubling every 45 days. Everyone is still trying to find the source of that information.
Electronic News: Given your push toward diversity, how much of your business is still dependent upon the communications market?
Bailey: Telecom is still about 60 [percent] to 65 percent of our revenue. I predict that in three years, it will account for only about a third of our revenue. Telecommunications companies over-invested in the late 1990s. The [competitive local exchange carriers] like Global Crossing began making investments and the [incumbent local exchange carriers] like Sprint and MCI felt they had to keep pace. At the same time, the Europeans overspent on 3G spectrum licenses. Deutsche Telekom spent so much that if you were to amortize it across a wireless subscriber base of 70 percent of Germany’s population, they would each have to pay $70 per month for 10 years just for Deutsche Telekom to break even. They thought people were going to spend $250 to $300 per month.
Electronic News: It looks like the Internet is taking hold in business, but the amount being spent is nowhere near that.
Bailey: But data services revenue is climbing as the Internet takes hold in business. Now we’re starting to see business processes taking advantage of the Internet. But because they overspent up front, now they’re underspending. There will be long delays in new investments. For 2003, we will bump along with lumps of orders. This is like a sailboat with no wind. When you get the slightest breeze and see the velocity increase, it’s going to seem like a big increase in percentage terms. I’m only expecting moderate growth in that market in 2004.
Electronic News: How much of your business is run globally these days?
Bailey: We have design centers in India, Ireland, Canada and the United States. We use a secure intranet to tie them all together. That means I can look at 3 a.m. and get the most up-to-date schedule to see who is late.
Electronic News: Is this kind of information available to customers?
Bailey: We make the same database used by a product management team available on a secure extranet, so customers can see where their chip design is.
Electronic News: Does that help with inventory management?
Bailey: Our databases are connected with our contract manufacturers as well as our customers so we can see what’s in inventory. What we still need to do is get access to our customer’s inventory.
Electronic News: Do you run through distribution?
Bailey: We have one distributor, Memec.
Electronic News: Let’s swap subjects here. You mentioned the printer market. Is there new life in that market?
Bailey: With all the online stuff, laser printers are even more important. There are thick documents being printed out. People want 30 pages per minute, and that’s being driven by processing power.
Electronic News: Any other markets you’re in that we don’t know about?
Bailey: We make the MIPS processor for the Sony Aibo dog robot.
Electronic News: Given this diversity, are you planning to move into any other markets?
Bailey: This is a lot to take on. We’re fully engaged in this. We’ve re-engineered the company. That’s what it’s going to take to come out stronger. We seeing an implosion in the ASIC market and an increase in R&D tooling for home entertainment, gateways, 802.11 and 3G. The big question now is what will be the next big driver of silicon consumption.
Electronic News: What do you think?
Bailey: There are component product cycles. We saw it with mainframes, minicomputers and cell phones. The killer app for semiconductors was in the military market.
Electronic News: Given your shifting business model, how high is your R&D as a percentage of revenues?
Bailey: This year we will spend $135 million R&D and our revenue will be $216 million to $218 million. That’s more than 50 percent. It should be in the low 20s. But our gross margins are about 60 percent and holding steady.
Electronic News: One last question. Who’s your toughest competition?
Bailey: In the MIPS processor area, it’s Broadcom at the high end. At the low end it’s IDT and the ASIC vendors. In mixed signal, it’s Marvell. And in telecom it’s AMCC and Agere.
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