FOOL post on AMCC
A. Top dog, first mover, in an important, emerging industry that is currently in the Tornado (hypergrowth), or is in the early stages of Tornado/hypergrowth growth. (Most of the signs of Tornado formation/growth as laid out in the Gorilla Game FAQ must be met; refer to item #12 in this post:
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AMCC is the arms dealer to the major networking companies. They make semiconductors that go into optical networking systems.
From their Yahoo! Profile:
biz.yahoo.com
"Applied Micro Circuits Corp. designs, develops, manufactures and markets high-performance, high-bandwidth silicon solutions for the world's optical networks. The Company offers integrated circuit (IC) products that enable the transport of voice and data over fiber optic networks by utilizing a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies. The Company's current IC products primarily address the needs of the fiber optic based WAN and LAN markets. The Company also markets and sells IC products that address the needs of the ATE, broadcast HDTV, high-speed computing and military markets."
From their latest 10-Q:
"We design, develop, manufacture and market high-performance, high-bandwidth silicon solutions for the world's optical networks. We utilize a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies to offer integrated circuit, or IC, products that enable the transport of voice and data over fiber optic networks. Our products target the SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel semiconductor markets. In addition, we recently introduced silicon ICs targeted for DWDM systems. We provide our customers with complete silicon IC solutions ranging from physical media dependent devices such as laser drivers and physical layer products such as transceivers to overhead processor products such as framers and mappers. Our products span data rates from OC-3, or 155 megabits per second, to OC-192, or 10 gigabits per second. We also supply silicon ICs for the automated test equipment, or ATE, high-speed computing and military markets."
Phileo wrote this great post for Rat's Broadband Bandwagon on the companies providing the "Picks and Shovels" to build the broadband fat pipe:
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However, the majority of this market is currently lead by three companies: BRCM, PMCS, and AMCC. With chips requiring a minimum of 12 months to design and manufacture, time to market pressures burden all of these companies. Huge battles will be fought just to gain fractional percentages of market share. It will be a game of inches, and the battles are won and lost according to:
1) time to market - Think about it this way: A seemingly impressive $425 Billion valuation of your company means jack squat, zip, NADA, IF you cannot move quickly enough to catch the company that just stole YOUR LUNCH. (with apologies to CSCO fans; It's one of those days, and I'm in one of those moods….). In fact, you will DIE of starvation unless you can move quickly enough to catch up to that company who stole YOUR LUNCH.
Again, the long design cycles to design and manufacture chips creates pressure to be quick to the market. And for broadband chip companies, it's not just the customers that are waiting, but also the customer's customers. BroadBand chip companies are not really selling chips, they're really selling time to market. Who has the best technology matters, but not as much at this point in time, while this market is still in hypergrowth.
2) design wins - the ability to get more and more customers to commit to your products and your solutions is of paramount importance, as it makes it that much harder for other competitors to "win" that customer.
3) Quality management that can execute. The company is the cell, the management team forms the nucleus of that cell. Do I really need to say more?
4) Value Chain formation - this one is difficult to track, but whoever signs the most partners, resellers, and alliances will win.
Of course, my personal favorite broadband thoroughbred is PMCS. However, I don't see any one of the top three (BRCM, PMCS, AMCC) having a clear advantage over the others.
Some may believe that companies like AMCC have excellent products, and are getting many design wins, but the same can be said of PMCS.
AMCC as a Rule Breaker
AMCC would not qualify as a traditional RB stock, it plays it role behind the scenes, benefiting enormously from the optical networking tornado playing itself out. NT is about 19% of its business with CSCO gaining ground at 15%. The great thing about AMCC is that it is supply-constrained and will "supply arms" to whoever is willing to pay the price.
AMCC as a Gorilla:
AMCC is not in a Gorilla Game, but is a Prince in a Royalty Game, competing with BRCM, PMCS and others in the sector. All of these companies are involved in a huge tornado that is just starting. Since it is in a Royalty Game according to GG it should be sold once the tornado is over. This may not happen for the next 10 years.
rchampoux wrote this excellent post in l'union fait la force describing what AMCC does and the competitive threat from BRCM with its Newport acquisition:
fool.com
First of all, there are four commonly used processes for manufacturing high-speed communications chips. First there is CMOS, which is the cheapest, easiest to manufacture and most efficient in terms of power usage, but also the most difficult to obtain higher speeds from. Next in order is bipolar, then comes silicon germanium (SiGe), then finally gallium arsenide (GaAs). The art and science in making these high speed chips is in the cost-benefit analysis between the need for speed, versus cost, difficulty of manufacture and greater power usage.
At present, the two main competitors in the long-haul, high-speed, optical / SONET / DWDM chip business are AMCC and VTSS. To oversimplify, VTSS was the earlier entrant, initially hung its hat on GaAs for its highest speed products, and is now evidently getting into SiGe on a limited basis. AMCC always preferred SiGe for its highest speed products. However, AMCC (and I would assume, VTSS, although I don't know for sure) always uses bipolar or CMOS whenever possible, as the cheaper, more easily manufactured, and more power-efficient alternative. VTSS initially was much larger than AMCC, but AMCC now appears to be catching up and is growing revenues and earnings at a faster rate. Last quarter, VTSS reported revenues of $114 million and pro forma income of $32.1 million, versus AMCC's revenues of $74 million and pro forma income of $27.9 million.
The primary market for AMCC and VTSS are chips where electronics interface with optical fiber. These chips basically manage a number of tasks related to optical-electronic conversions at very high speeds, including amplifying and/or grooming the signals, coordinating the timing of the incoming optical signals with the outgoing electrical signals, pointing the signals in the right direction (if the incoming signal is optical, there will often be one optical port for the incoming signal, but four or sixteen outgoing ports for the electrical signals), and converting the optical signals from analog (or serial) format, to digital (or parallel) format. To explain the last function further, when an optical signal comes in over fiber, it's like a very high speed Morse Code, where the light is either on or off. However, my understanding (and I may be wrong on this) is that when the signals are converted to electronic signals, the fact that the electronic signals are communicated in bytes (8 separate instances of "1"s or "0"s) means that the signals need to be converted into a parallel form. This involves all kinds of interesting timing and mapping issues.
B. Sustainable advantage gained through business momentum, patents, visionary leadership, high barriers to entry, and high switching costs.
Business momentum:
AMCC is showing a great deal of business momentum. While NT may have stumbled a bit this last quarter, AMCC posted another stellar quarter.
foolhardy20 posted the latest CC notes:
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Revenue: up 156% yr-yr, 31% sequential
Operating Income: up 216% yr-yr and 35% sequential (note: operating income, not net)
Gross margin: 74.8%, up from 74.0% last qtr and 70.1% last year
Operating margin: 41.8%, up from 40.4% last qtr and 33.9% last year
-snip-
CEO Dave Rickey Comments:
Non-Nortel communications revenue grew 70% sequentially and 250% yr-yr.
14 customers purchased greater than $1M in quarter. Of those 14, the following grew more than 70% sequentially - Alcatel, Cisco, Hitachi, JDS Uniphase, Juniper Networks, Lucent, Sycamore Networks, Tellabs, (one more I couldn't hear).
-snip-
OUTLOOK:
Demand remains strong as evidenced from bookings. The CEO is giving the SAME GUIDANCE he has for the past two quarters - 20% sequential revenue growth, NOT INCLUDING the MMC acquisition (i.e check MMCN's numbers to get an overall revenue estimate for next quarter).
External supply is the biggest near-term risk. However, believe they will continue to meet all of their targets (notice, no mention of any "telecom slowdown" or slowing of demand whatsoever. The problems Lucent, Motorola, Nokia and the dozens of other companies are having do not seem to be of any concern to AMCC).
Nearing operating targets of 75% Gross margin, R&D of 21%, SG&A of 14% and operating margin of 40%. The operating margin may slip back fractionally towards 40% as they spend appropriately for growth.
In conclusion, the CEO says he has never felt better about the prospects for AMCC.
That sounds like a company hitting on all cylinders.
"C. Excellent Growth Metrics"
RELATIVE STRENGTH:
AMCC's Relative Strength in the past 12 months, according to www.moneycentral.com, is 97 (as of 12/14/00). According to IBD (as of 12/14/00) AMCC had a RS of 92. (Of note also is that they have a 99 EPS rating in IBD).
2 points.
(Considering the type of market we are in for tech stocks, I would consider this extremely strong performance).
Here are last 2 quarter's numbers digested by mikegavone:
8/20/00
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11/25/00
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I want to point out that AMCC's Gross Margins stand at almost 75%! A very impressive number for a chip company.
AMCC had a RM ranker done by iyer, it yielded a very impressive score of 48:
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AMCC is in the tornado, with hypergrowth seen for its optical chip products based on SiGe.
SALES GROWTH (numbers in thousands):
YoY (3 month numbers):
Sep 1999 - Sep 2000: $97,007
Sep 1998 - Sep 1999: $37,898
That's a growth of 156%.
2 points.
Sequential (3 month numbers):
Jun 2000: $74,188
Sep 2000: $97,007
That's a sequential quarterly growth of 31%, a very respectable number.
2 points.
"D. Clear signs of solid execution by a strong management team; Value chain in place or shows clear signs of developing (eg. alliances, joint ventures, partnerships, signing up distributors, third party developers, and VAR's)"
AMCC has a strong value chain, taken from AMCC's corporate profile:
amcc.com
Among the Company's many customers are Alcatel, Cisco Systems, Juniper Networks, Lucent technologies, Nokia, Nortel Networks, Siemens and 3Com.
AMCC supplies all the major networking names.
Management has very strong credentials:
amcc.com
"E. Company products and brand name are well recognized and respected by its customers, peers, competitors and partners in the relevant industry."
AMCC is very well respected in the optical space.
A good example is this article describing AMCC's merger with MCC:
electronicnews.com
Semiconductor analyst Linley Gwennap said the $4.5 billion acquisition this week put AMCC in a better position to compete with PMC-Sierra Inc. and Broadcom Corp. However, the companies AMCC really has to watch out for are Intel Corp. and Motorola Inc., which bring considerable amounts of manufacturing and R&D resources to the game.
"There have been so many mergers in this space that I didn't think MMC—as an independent network processor company—had a good enough chance to compete," Gwennap said. "But now that they've merged with AMCC, it is still going to be tough. Intel and Motorola spend hundreds of millions of dollars in research and development, where AMCC spends tens of millions of dollars."
But for David Rickey, chairman and chief executive officer of San Diego-based AMCC, it is the PMC-Sierras and Broadcoms that should beware. His company now is focused on the young upstarts in the communications semiconductor business and MMC brings a strong upside that competitors don't have: actual silicon in the emerging network processor market.
"MMC's market is still immature compared to AMCC's market (of optical network silicon)," Rickey said. "As more customers come forward, it will fuel future growth as those markets mature."
"We now have the most powerful combination in the business," Rickey continued. "We have products all across the board in the networking space. Some of our competitors are offering network processors but they are not shipping product. Where are they?"
Offering a complete line of products to network equipment builders has become increasingly important as Motorola, Vitesse, PMC-Sierra, Broadcom, Conexant and others seek to fill out their portfolios. Designers developing systems need merchant chips that work together, according to analyst John Metz, of Sterling Research, Sterling, Mass. Buying chips from even just two different companies requires glue logic, custom ASICs or an FPGA to make everything interoperate. That can kill a manufacturer's time-to-market advantage.
MMC hit the streets first in the network processor game. It is already on its second and third generation of products, while other companies are struggling to get their first product out the door. However, MMC was a relatively small guppy in a sea of big fish, and although it won some big contracts with its technology, the loss of a couple of big customers in 1999 took away almost half of its revenues.
"F. Valuation metrics: "
(as of 12/14/00)
biz.yahoo.com
MktCap:$19.96
BP/E: 292.21
P/S: 63.73
Risk:
The main risks faced by AMCC are execution in the face of strong competition. They need to keep ahead of the competition in terms of performance and price. The other major risk is that of a major capital expenditure slowdown by their customers (CSCO, NT, others). While much has been made of that, I believe that the slowdown effect has been overestimated and the demand for bandwidth is very far from being satiated.
From their latest 10-Q:
In the communications markets, we compete primarily against Conexant, Giga (acquired by Intel), Infineon, Lucent, Maxim, Philips, PMC-Sierra, TriQuint and Vitesse. Some of these companies have significantly greater financial and other resources than us, and some of these companies use other process technology such as gallium arsenide which may have certain advantages over technology we currently use. In certain circumstances, most notably with respect to ASICs supplied to Nortel, our customers or potential customers have internal IC manufacturing capabilities.
The current risk du jour for optical networking supply companies is that the market will no longer award premiums to hypergrowth companies, and thus value them with low multiples to revenues and earnings. We'll have to see how the market behaves, but this is a risk all RB-type stocks face when the Nasdaq heads south.
SUMMARY:
AMCC is a very strong company, really a Rule Tweener, and a very strong prince in the middle of hypergrowth. It deserves due consideration for inclusion into KARB.
-xerohype
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Jack |
