07:31am EDT 12-Oct-98 BancBoston Robertson Stephens (Moosa, Elias 415-693-3418)
THE COMMUNICATIONS IC REPORT (Page 1 of 3)
T H E C O M M U N I C A T I O N S
I C R E P O R T
Elias Moosa (415) 693-3418 elias_moosa@rsco.com
Mark Edelen (415) 248-4688 mark_edelen@rsco.com
This bi-weekly report is focused on the communications device segment of the
semiconductor industry. Driven by our interest in company valuations, The
Communications IC Report is keyed to events, trends and new developments that
are making an impact on stocks in this sector. In the following pages, along
with an overview of the state of business, we examine stock action in the
group, material developments at device and system companies, important product
news and we discuss emerging trends in the space. Readers' questions and
comments are always welcome.
Stock Action: Enough Already...
The two weeks since our first report have not been peaceful for
stocks in our universe. Coming off fearful sell-offs following
news from Tellabs and Alcatel, word of slowing growth in the
fourth quarter coming out of Northern Telecom's analyst meeting
on September 28th sent the group plummeting -- AMCC was down 12%
in the three days following the meeting (about 17% of AMCC's
business comes from Nortel. Vitesse, PMC and Level One were down
28%, 19% and 19%, respectively. Nortel did indicate that its
Broadband business remained strong, but there was a slowing in
demand from operators, and RBOCs in particular, for the balance
of the year. Various theories were floated about the reasons
behind a slowdown among operators: A potential bandwidth glut or
a technology transition period ahead of deployment of packet-
based public networks. While we find it hard to believe that a
bandwidth glut has emerged or that it can last, we find the
circuit-to-packet transition theory more credible. Nevertheless,
we don't believe it -- we frankly haven't heard any word from
operators or OEMs about it. Moreover, that argument could have
been made at any point over the past year. We do believe that
operators are more conservative, however. We attribute that to
legitimate worries about a GDP slowdown in the coming year.
Management at operators, like most others, may have taken a
pause to evaluate prospects. As we see it, the key question that
will need to be answered coming out of the service provider
conference calls will be: Will there be a cut-back in capital
expenditure spending for 1999?
We saw profit taking in the Communications IC stocks make for an
abrupt end to a month-long, 16%, rally in the technology heavy
NASDAQ Index. During the week of September 28th, the NASDAQ
Index was down over 7%. The week of October 5th saw an even
sharper sell-off, with the NASDAQ Index down 12% by the close of
trading on Thursday on very large volumes that reached nearly a
billion shares. Friday's rally provided some lift but left the
NASDAQ down 8% for the week. During this last week,
Communications IC stocks fared relatively well, however. AMCC
rallied, while Vitesse and PMC shook-off downgrades by a Wall
Street firm and held up relatively well to the market for the
week. Meanwhile, Galileo declined sharply for the week, which
could be explained by tax-loss selling. Such selling often
plagues already badly trampled stocks in the fourth quarter, as
fund managers jettison stocks with large unrealized losses to
spare their own shareholders the tax burden on any gains for the
year.
We were impressed by the solid relative performance in some of
the names in our universe during the past week. In our view, as
we enter the earnings season, investor attention may shift away
from the predictions of a recession in 1999 and focus more on
the near-term fundamentals of the companies reporting. Should
that happen, we do anticipate that a rally in some of the names
with solid visibility and improving fundamentals can be
possible. In an absurd turn, we are comforted that at least all
the sacred cows -- Enterprise Software, Telco Equipment -- have
been slain. Given the short attention span of Wall Street,
however, we already fear the end of reporting season as the
world's macro-economic issues hardly appear resolved. Sure, the
Yen is stronger and that helps sustain the rest of Asia's
economies, but we can now worry about a weak dollar's stifling
effect on further rates cuts. Oh, we almost forgot...there is
also going to be an impeachment investigation in Washington.
Will that be good for our stocks? Enough already!
Figure 1: Comparative Price Table
Price % Change
Index Symbol 10/9/98 9/28 to 10/5 to YTD
10/2 10/9
Applied Micro Circuits Corporation AMCC 17.63 -15% 29% 42%
Anadigics ANAD 5.5 -17% -15% -82%
Galileo Technology GALTF 7.13 -5% -25% -75%
Level One Communications LEVL 17.87 -19% -8% -5%
PMC-Sierra PMCS 27.5 -22% 2% -11%
Vitesse Semiconductor VTSS 18.88 -29% -5% 0%
BRS Communications IC Index BRS 23.31 -15% -1% -5%
Dow Jones Industrial Average INDU 7899.52 -3% 1% 0%
PHLX Semiconductor Index SOX 200.8 -10% -1% -24%
Russell 2000 Index RUT 318.4 -5% -9% -27%
NASDAQ Composite Index NASD 1492.49 -7% -8% -5%
Source: AT Financial and Factset.
Products in the News
Start-Up Cimaron Joins SONET/ATM Fray
Cimaron Communications Corporation this week announced the
availability of CONGO, an ATM/SONET framer IC for OC-3 and OC-12
(622Mb/s) data rates. This function forms the core of switch or
router equipment interfaced to SONET networks and is usually
implemented as an ASIC. CONGO is unique in the way it includes
ATM, Packet over SONET (POS) and DS-3 interfaces. The CONGO chip
follows Cimaron's recent announcement of NILE, an OC-12
ATM/SONET framer with support for DS-3 which will be used by
Ascend Communications in future WAN products. Cimaron also
licenses its technology (Intellectual Property, or IP) as ASIC
cores.
The availability of standard products in this area should help
reduce the cost and development time of high-speed networking
equipment and make the high-speed market more accessible to
small-cap network equipment companies. Cimaron's product
strategy, especially in the ATM sector, pits them against PMC-
Sierra who is renowned for market dominance and high margins in
the ATM 155 and 622Mb/s framer space. Cimaron's and PMC's
product capabilities are not identical and so there is no
immediate product-to-product competition. But the battle for
future system design-ins is just starting.
Vitesse Semiconductor (see next item) has also announced similar
framer products (V-FRAME 2.5), but targeted at the 2.5Gb/s
market which Cimaron and PMC have yet to address. Note that
framer chips do not displace physical layer (PHY) ICs in system
implementations. So PHY ICs, from Vitesse and others, are still
needed. But as the market for OC-12 and eventually OC-48 POS and
ATM hots up expect to see more head-to-head competition between
these three companies in the framer area.
Vitesse 2.5Gb/s Line Just Keeps Growing
This week Vitesse Semiconductor announced two new 2.5Gb/s SONET
ICs: The VSC8120, a Clock and Data Recovery (CDR) and the
VSC8121, a Clock Multiplication Unit (CMU). These are marketed
as part of the V-PHY 2.5 family of products, which includes
previously announced multiplexer and demultiplexer chipsets. In
the last issue of The Communications IC Report we discussed
Vitesse's V-DRIVE 2.5 family of 2.5Gb/s laser and optical
modulator driver ICs. Late August saw Vitesse launch the V-FRAME
2.5 family of SONET/ATM framer ICs, which takes Vitesse beyond
the physical layer and into adjacent framer functions.
These announcements support our belief that Vitesse is among the
best positioned to ride the growth in 2.5Gb/s SONET
communications, the data rate at which high-end telecom and
datacom are converging. No other vendor to date is able to
demonstrate a product line that extends from the low-speed
interface through to the optical interface. This market is
attracting other credible players, notably AMCC, Rockwell and
ATM giant PMC-Sierra, and also private companies such as Cimaron
and Softcom.
AMCC Introduces New Gigabit Ethernet Transceiver
This CMOS 2060 device is a low-power, single chip solution and
follows on from AMCC's recently announced 2064 and 2065 quad
backplane ICs, which were also fabricated in CMOS. The 2060 is a
drop-in replacement for AMCC's bipolar-fabricated S2052, with
better performance, power, and jitter specs. These products
suggest that 1Gb/s performance can be achieved in CMOS, whereas
current solutions are bipolar or GaAs. We believe that the new
year will mark an acceleration in demand for Gigabit Ethernet
equipment. With that belief, we expect to see additional
products announced for this market from numerous gigabit IC
vendors.
ITeX continues to be active on the ADSL IC front
Apollo 2, the Company's new chipset is designed to receive data
at 6 Mbits/s downstream and 640 Kbits/s upstream. The product is
a three-chip solution consisting of a PCI controller, a DMT/ATM
framer IC and an analog front-end chip. The chipset is slated
for production in the first quarter of 1999 and priced at $65 in
1,000 piece lots.
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