let's get ready to rum-bull!
tomasetto pulls no punches.
Silicon Valley: Off to the Races
TheStreet.com
September 29, 1998
By Marcy Burstiner
Staff Reporter
SAN FRANCISCO -- If you want to get David Rickey started, just mention gallium. The impassioned 42-year-old president and CEO of Applied Micro Circuits (AMCC:Nasdaq) heads a company specializing in chips for telecom equipment -- this year's hot sector in the sluggish chip market. Trouble is Applied Micro's nemesis, Vitesse (VTSS:Nasdaq), is way ahead thanks to its use of a gallium compound for better speeds.
Applied's synchronized optical network chips take light waves off fiber, convert them into electrical signals and then shoot them onto a telephone line or hub. The worldwide market for these chips is expected to grow from $340 million in 1997 to an estimated $433 million this year, making it the fastest-growing sector of the chip market. But Rickey is busy figuring out how he can recapture the lead.
"Vitesse won a lot of design wins in the mid-90s, and they will go on for years," Rickey said. "In the last year and a half, we are doing very well with design wins. But you won't see the revenues from that for another year."
Both AMCC and Vitesse started out two decades ago making chips for supercomputers, military applications and testing equipment – markets which collapsed in the early 90s. Prior to 1996, Applied Micro led Vitesse in annual sales. But then the Internet exploded and created an unexpected demand for communications chips, because the telecom companies needed to move huge volumes of data. Vitesse took off -- more than doubling its revenue in 1997 to $105 million. AMCC, with $77 million in estimated 1998 sales, has trailed its rival ever since. For the past year, investors have flocked to Vitesse, which is expected to bring in $173 million in sales.
What sets the two apart is that while Applied Micro makes its chips out of old-fashioned silicon, Vitesse uses gallium arsenide (GaAs), a compound it pioneered in 1984. Silicon's advantage is that it is cheaper to produce in volume. But in telecommunications, faster is better and GaAs zaps past silicon.
Rickey has to convince investors he has the fastest chips in the West.
"Vitesse once said that you couldn't do 622 megabits a second on silicon, and now they acknowledge that we are doing 2.5 gigabits," Rickey said.
Fast -- but not fast enough. Vitesse is now producing GaAs chips that can process 10 gigabits. How fast is that? Dell's (DELL:Nasdaq) top hard drive can store 9.1 gigabits of information. The GaAs chip lets you send all the data that drive can handle and more from California to New York in one second.
So Applied Micro needs to get faster. In July, the company signed a deal with IBM (IBM:NYSE) for use of new silicon germanium technology – a process to pump speed into the silicon chips. If Applied Micro can match the speed of GaAs, the telecoms will beat a path to its factory door in San Diego, Calif. because of silicon's lower prices. Gallium arsenide will be obsolete in five years and so will Vitesse if it doesn't change its ways, Rickey tells everyone who will listen.
But over at Vitesse, CEO Lou Tomasetta shrugs off Applied Micro's challenge. Tomasetta is already making his chips more affordable with increased volume coming out of a new Colorado fab. Gallium arsenide obsolete? Silicon is already passe, he said.
"History has made its decision on bipolar silicon -- most big players have gotten out of the business -- AMD [AMD:NYSE], Fujitsu, NEC [NIPNY:Nasdaq ADR], Texas Instruments [TI:NYSE]," Tomasetto said. "The reality is that the parts we build are better, they are still the fastest transmitters and gallium arsenide is the simpler manufacturing process."
Aside from the material they work with, the companies are quite similar. Both have CEOs under age 50 -- putting them among the second generation of semiconductor execs. Both companies are based in Southern California. And both were in a funk in the early 90s until they each transformed themselves for the new data-networking world.
BancBoston Robertson Stephens semiconductor analyst Elias Moosa has a strong buy rating on Applied Micro and a buy rating on Vitesse, but only because Applied Micro is a comparable bargain. (BancBoston Robertson Stephens has been an underwriter for both companies.)
Both companies are reaping profits and are expected to continue to do so. Analysts expect Vitesse to earn 83 cents per share next year, up from 66 this year, according to First Call, and AMCC is expected to pull in 92 cents per share, up from 73 this year.
Noted technology investor Jon Gruber, with San Francisco's Gruber & McBaine, held a small stake in Applied Micro earlier this year, but sold it. But he has held on to Vitesse for several years and has no intention of shorting it. "Vitesse's biggest customer is Lucent [LU:NYSE], and Lucent is clamoring for more parts all the time," Gruber said.
Rickey would love to bring on Lucent and Ericsson (ERICY:Nasdaq ADR), but he knows there is little chance. "Once you win a design win in this industry, it is yours," Rickey said. "The infrastructure is incredibly expensive. Switches can cost hundreds of thousands of dollars.
Applied Micro sells to 3Com (COMS:Nasdaq) and Northern Telecom (NT:NYSE), and both Vitesse and AMCC sell to Alcatel (ALA:NYSE) and Cisco (CSCO:Nasdaq). But in this business, your biggest customers can also be your biggest competitors: Lucent sells more communications chips than Vitesse and Applied Micro combined.
"Vitesse has a lot of big telecoms locked up on gallium arsenide," said Merril Lynch analyst Joseph Osha. "The telcos like whatever works and whatever has been demonstrated to work. Lucent or Nortel don't switch suppliers lightly." (Merrill is not an underwriter for either company.)
That is why Tomasetto is in a confident mood. Check back in five years and see who is still standing, he taunts. "We will let the numbers speak for themselves. We have been cleaning their clock for 10 years." |
