IDT shows faith in communications
By Robin Lamb, EBN
URL: ebnews.com
Despite the drawbacks of having its fortunes tied to the sluggish communications market, Integrated Device Technology Inc. has no plans to change its strategy or business mix.
Rather, the Santa Clara, Calif., chip company has relied on internal changes and cutbacks to help it ride out the downturn.
From shuttering an aged fab to cracking down on spending, IDT has labored to reduce its operating costs and return to profitability.
“The greatest changes have been financial,” said Greg Lang, president of IDT. “We've tightened discretionary spending and consolidated our facilities.”
During the past year and a half, IDT has taken various measures to size the organization, according to Dave Côté, IDT's vice president of marketing and communications ASSPs. In addition to discretionary spending cuts, the company reduced capital spending.
“We're probably under $50 million in capital expenditures,” Côté said. “Our depreciation is larger than our capital output.”
The most notable change for the company has been the closure in June of its Salinas, Calif., fab. With estimated savings between $6 million and $8 million a quarter, the company in January announced it would shut the factory and lay off about 260 workers.
At the time, the plan was to consolidate production from the 6in.-wafer fab into IDT's 8in.-wafer plant in Hillsboro, Ore., by September. Because production was done in a “timely way,” IDT was able to close the facility three months early, according to Côté.
“As time went on, process technology moved beyond that factory, and as the economy slowed, it accelerated the closure of [the Salinas] factory by about a year,” he said.
No plans to change
IDT made a fundamental shift from commodity-driven products once before. In the late 1990s, the company reduced its exposure to the PC business and transformed itself into a supplier of communications semiconductors.
It took a while for the company to shake the image of a memory supplier, but in the last quarter SRAMs represented just 15% of total revenue, while communications ICs accounted for 62%.
“We are a semiconductor company for the communications business market,” Lang said. “The downturn has not changed our focus. We still believe the fundamentals are there for this business to thrive again.”
For now, the depressed communications market is showing little signs of revitalization, indicating an uncertain future for IDT.
“Alcatel, Cisco, Ericsson, and other [communications companies] are all in dire straits in terms of equipment sales,” said Richard Gordon, an analyst at Gartner Dataquest in Lowell, Mass. “We'll start to see some increase in spending [at these companies] as budgets get reviewed. But for the second half of the year, there's not much to talk about in the telecom equipment space.”
Still, the company remains optimistic about the future of the communications end markets.
“The network continues to grow,” Côté said. “Despite the downturn, network traffic grows two to three times a year. Our customers just overbuilt. During the course of the next several quarters, they will need to upgrade their equipment because of obsolescence and increased demand.”
An additional boost to IDT is coming from its transition from commodity to proprietary products, as the company shifts from SRAMs to FIFOs and multiport ICs, said Jack Romaine, an analyst at SG Cowen Securities Inc., Boston.
“The transition is taking place slowly because of the downturn, but it will make IDT a more profitable company when the recovery comes,” Romaine said.
IDT's IP co-processor, which makes up about 15% of its total revenue, is marketed only to Cisco. By the end of December, Romaine expects that to change, with a different version being sold to the general market.
IP co-processors, coupled with FIFOs and multiports-products that are a combination of memory and logic-make up about 55% of IDT's total business and help distinguish it from the competition, according to Romaine.
“IDT has 65% to 70% of the market in FIFOs and multiports, with Cypress [Semiconductor Corp.] making up much of the remainder,” Romaine said. “In IP co-processors, they have about 70% to 80% of the market.”
Broad but focused
For IDT, though, the most immediate challenge is looking for ways to thrive despite the economic environment.
“We have both a fairly broad product line and a fairly focused business strategy,” Lang said. “Probably the only market we don't serve is the consumer market. I don't think we have any plans to change that. I don't think we'd benefit from [diversifying].”
IDT has narrowed its net loss as revenue has improved steadily this year. The company's revenue had dwindled to a low of $80.2 million in its fiscal 2002 third quarter, which ended Dec. 30, but bounced back to $91.8 million in the June quarter.
“If you look at the last two quarters, they have performed relatively well,” said Sandy Harrison, an analyst at Banc of America Securities LLC, San Francisco.
However, IDT is expecting revenue to be flat this quarter. Cisco ordered more in the June quarter, when it made up roughly 26% of IDT's sales, but is not expected to do the same in the current quarter, Harrison said.
“If you want to have large exposure to a customer, Cisco would be the one,” he said. “But with large exposure to any customer, if the customer hiccups, you feel it.”. |
