S S B ~ May 5, 2000
05/05/00 PMC-Sierra (PMCS $172.00,1-H,Tgt $250.00) Clark Westmont
--SUMMARY:--PMC-Sierra--Semiconductors
* On Thursday, PMC-Sierra hosted an in-depth product and strategy review
for analysts, its first in several years
* The presentations emphasized the company's breadth and depth of its
technology portfolio.
* For example, the company has 70 chips in production today and another 25
due to be introduced this year.
* We believe the company is extremely well-positioned to be a dominant
player in broadband communications chips now and for the foreseeable
future.
05/05/00 PMC-Sierra (PMCS $172.00,1-H,Tgt $250.00) Clark Westmont
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/99 EPS $0.06A $0.08A $0.12A $0.13A $0.39A
Previous 12/00 EPS $0.17A $0.18E $0.21E $0.22E $0.78E
Current 12/00 EPS $0.17A $0.18E $0.21E $0.22E $0.78E
Previous 12/01 EPS $0.23E $0.25E $0.28E $0.30E $1.06E
Current 12/01 EPS $0.23E $0.25E $0.28E $0.30E $1.06E
Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
05/05/00 PMC-Sierra (PMCS $172.00,1-H,Tgt $250.00) Clark Westmont
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (05/04/00)....:$172.00
P/E Ratio 12/00.....:220.5x Target Price..:$250.00 Prior:No Change
P/E Ratio 12/01.....:162.3x Proj.5yr EPS Grth...:40.0%
Return on Eqty 99...:N/A% Book Value/Shr(00)..:1.63
LT Debt-to-Capital(a)0.3% Dividend............:$N/A
Revenue (00)........:501.50mil Yield...............:N/A%
Shares Outstanding..:166.6mil Convertible.........:No
Mkt. Capitalization.:28655.2mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
05/05/00 PMC-Sierra (PMCS $172.00,1-H,Tgt $250.00)
--OPINION:------------------------------------------------------------------
PMC-Sierra held an analysts meeting on May 4, with management giving
their views on market trends as well as the company's technology and
strategy that should keep it at the forefront in the ever-evolving
broadband chip market.
Trend Analysis
PMC-Sierra management outlined several trends that will characterize the
evolution in broadband communications. The company targeted the year
2003, and described the state of the market and the trends to get there,
in their view. PMC discussed developments in the broadband chip market
and its competitive landscape, network architecture trends, as well as
its views on semiconductor manufacturing developments.
Broadband System Trends
The broadband chip market cycle is entering a competitive phase.
Velocity to market is paramount, in that it is important not only to be
early but also to be headed in the right direction. System level
solutions will be a major driver in securing design wins. Chip makers
that once "peacefully" co-existed on a board now find themselves
competing at the architecture level, setting the stage for fierce
competition. By 2003, according to PMC-Sierra, three companies will
control 80% of the broadband semiconductor market.
Despite the prognosticators who predict the demise of all that is not
Internet Protocol (IP) in the Wide Area Network (WAN), PMC believes that
the network will be an amalgamation of IP, ATM, and TDM over optical
transport, likely using a SONET frame for long-haul transmission.
Moreover, the network's architecture will become more streamlined with
the elimination of several equipment layers as semiconductor
manufacturers strive for more integration and higher speeds.
The trends in broadband communications seems to re-define an old axiom:
it is no longer that the large will eat the small, but rather that the
fast will eat the slow. The communications market is growing so quickly
that fast, nimble equipment start-ups are able to develop products with
core intellectual property that have advantages over solutions provided
by the large OEM vendors. In three years, the majority of PMC's revenue
will likely be derived from today's start-ups, including those that are
eventually acquired by larger OEMs.
Line card port densities should continue to quadruple every two years.
For example, PMC's single channel COMET T1/E1 transceiver evolved into
the four channel COMET-QUAD and the 8 link FREEDM-8 HDLC manager led to
the 32 link FREEDM-32.
PMC believes that by 2003 most internet terminals will be wireless. This
opens up new opportunities for WAN edge equipment, which will provide
broadband connectivity with 3G wireless base stations. Internet IC chip
content could range from $15 to as much as several thousands of dollars
per base station.
Internet IC Trends
Much of the intellectual property in a broadband communications system
design lies within the mixed-signal chips that serve as the interface
between the transmission medium (such as optical fiber) and the digital
chips that handle framing and higher level processing. In fact, these
chips could grow in size to over 20 million gates. Time-to market
demands will require designers to utilize intellectual property that is
re-usable from one mixed signal design to the next.
Another ramification of the extremely competitive nature of the
communications industry and the importance of time-to-market is the shift
in chip selection. More and more customers will select off the shelf
application-specific standard products (ASSPs) rather than spend the time
to design custom chips. Thus, ASICs (application-specific integrated
circuits) will continue to lose ground to ASSPs, which will dominate the
silicon content in broadband communications designs.
Foundries Will Play a Major Role
The fabless semiconductor manufacturer model will continue to empower
foundries. According to PMC management, 0.13-micron chips will be
available from foundries before mainstream ASIC suppliers. Certainly,
foundries are no longer trailing-edge manufacturers, and are even now
giving the most technologically advanced companies a run for their money
when it comes to process technology. Moreover, PMC management believes
that only about ten non-foundry semiconductor companies will build new
fabs in 2003.
Strategy: Sockets to Systems
PMC is addressing the challenges it faces today to ensure that the
company maintains its leadership position in the years to come.
PMC-Sierra perceives itself to be a system solution company that happens
to sell chips. The company can offer complete solutions to its customers
that include all the necessary chips for physical interface, packet or
cell processing, traffic management, backplane interface, and switch
fabrics. The company is a virtual one-stop shop for multi-protocol
aggregation solutions at the edge of the WAN. By converting from a
socket-sell to a system-sell strategy, the company has increased its
dollar content per board, while offering the customer a better cost value
compared to a piecemeal approach, not to mention the time-to-market
advantage of using sets of chips that are proven to work together.
The company currently has 70 products in production, and is broadening
its portfolio by 25 products to be introduced this year. The company is
committed to the architecture-level product development, highlighted by a
few recent product introductions. For example, PMC-Sierra announced in
April a new switch fabric chipset called Tiny Tera One (TT1), which can
switch up to 32 ports of OC-192 traffic, or up to 320 billion bits per
second. The TT1 chipset, which sells for upwards of $7000, can be the
core of high capacity switches, routers, and DWDM equipment. Indeed, a
fully-configured system may have up to $50,000 in TT1 silicon content.
Later in April, PMC announced a new OC-48 architecture, which the company
calls CHESS. The CHESS architecture may be used in WAN edge equipment
that must aggregate SONET rates of OC-3, OC-12, and OC-48 for DWDM
systems. PMC claims that it has about 50 CHESS design-wins--or about 10
platforms assuming 5 chips per system. On May 4, PMC introduced a new
OC-48c transceiver chip that works with the CHESS architecture called the
S/UNI-2488, which is the industry's first transceiver/framer made in
standard silicon CMOS. These products underscore PMC-Sierra's commitment
to developing system solutions with highly-integrated silicon CMOS
circuits.
Not all of the intellectual property that PMC boasts was developed
internally. Several pieces to the system solution puzzle came about by
acquisition, and more are sure to follow. The recent AANetcom
acquisition added high-speed backplane transceiver technology to the mix,
providing the circuitry that connects line cards to switch fabric. By
acquiring Extreme Packet Devices, PMC has added traffic management
expertise to its portfolio. In general, the company looks for "Grade-A"
teams with significant technology innovation that have firm design wins
and positive momentum.
PMC-Sierra is making major strides in staying ahead of the trends that
shape the communications chip market. We believe the company is extremely
well-positioned to maintain a dominant position at the edge of the WAN
with its aggressive product and acquisition strategies, its corporate
culture that stresses execution performance, and its commitment to
recruiting and maintaining top engineering talent.
As far as current business status is concerned, the company discouraged
discussions of current conditions, wanting instead to make this a pure
technology and strategy discussion. That said, all indications are that
the demand environment remains very strong, and we believe there
continues to be good upside potential to Street expectations for the
company.
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