Cirrus dropping from PC market
BY TOM QUINLAN
Mercury News Staff Writer
Semiconductor pioneer Cirrus Logic Inc. is dropping out of the PC market it helped create 16 years ago, jettisoning as much as 28 percent of its workforce in the process.
Most of the 400 to 500 layoffs announced Thursday will take place at the company's Fremont headquarters. The company is also eliminating an estimated two-thirds of its chip manufacturing capacity; it plans to write off a half-billion dollars for the restructuring.
Like many small to mid-size chip makers, Cirrus has struggled amid the increasingly fierce price competition in the personal computer market. It has been de-emphasizing its PC product lines in favor of more profitable specialty chips for more than a year.
But the semiconductor industry's withering slump -- and particularly the glut of manufacturing capacity, which has hurt far more than the Asian meltdown -- caused company executives to accelerate their plans. Similar moves have been made by nearly every major chip and chip equipment firm, but Cirrus' cuts -- on a percentage basis -- are among the industry's most drastic.
From a peak of 3,100 employees in 1996, Cirrus dropped to 2,500 in 1997 and then to 1,800 currently. The new layoffs will leave Cirrus at about 40 percent of its peak size.
''In 1995, when we were entering into agreements (to obtain manufacturing capacity), someone predicted that the industry wasn't manufacturing enough wafers to meet demand,'' noted Michael Hackworth, the company's longtime CEO and chairman. ''At the time I thought, 'Well, as soon as someone says that, everyone's going to increase capacity.' Sure enough, in 1996, overcapacity caused the bottom to fall out of the market.''
Cirrus has joint manufacturing agreements with IBM and Lucent that require payments whether or not it uses the manufacturing capacity. That was a primary factor in the chip company's decision to drop its less profitable businesses, according to company President David French. Cirrus hopes to sell its stake in the joint venture with Lucent and restructure its agreement with IBM.
But Cirrus' decision also reflects just how difficult it is to stay on top in the PC industry.
Founded in 1984, Cirrus was conceived in 1982 to incorporate the research of Massachusetts Institute of Technology scientist Sulas Patil, who remains chairman emeritus of the company. Its semiconductors played a key role as PC manufacturers sought to integrate components like disk drives, monitors and modems into a smoothly functioning product.
For years, Cirrus was the dominant maker of graphics chips for PCs and a pre-eminent maker of modem chips. But over the last few years, it was eclipsed by competitors who developed better-performing and cheaper products.
In the first quarter, graphics and modem chips made up just $33 million of Cirrus' $177 million in sales. Now those two lines will be eliminated.
Gone, too, is an advanced communications research and development effort that had not yet spawned any products, French said.
''In general, there's a lot of turmoil in the PC components market,'' noted Michael Feibus, founder of the market research firm Mercury Research. ''There's huge margin pressure, excess supply, and the platform isn't advancing as fast as it was.''
Another factor is that chip giant Intel Corp. is currently adding new capabilities onto its microprocessors, increasing the pressure on traditional manufacturers of graphics, audio and modem chips.
''I don't think I'd be very successful betting against Intel's integration road map,'' French said.
Now the company will focus its efforts on high-margin semiconductor products for the audio, disk drive and data collection markets, which have recently made up the bulk of the company's sales. Cirrus will continue to manufacture audio chips and networking cards for PCs, but most of its business will come from other areas.
''We're going to focus on those areas where we have a leading market position,'' French noted, particularly markets that continue to offer high profits.
At their core, most of Cirrus' successful products are mixed-signal devices that transform analog information into a digital format and vice versa -- reading data from disk drives, say, or monitoring the temperature of a factory floor. That's a less competitive field than the market for traditional PC components, French said.
Even in the face of tough competition, Cirrus had seemed to turn the corner recently. After posting losses in both fiscal 1996 and 1997, the company reported a $36 million profit for fiscal 1998. The company also posted a profitable first quarter of 1999, and expects to break even in the current quarter, which ends this month.
''Not too badly is not nearly good enough,'' French said of the company's decision to pull the plug on it underperforming divisions. ''Companies that are in the markets we intend to focus on have shown the ability to be profitable even in this kind of a market.''
Analysts endorsed the Cirrus plan, even though the move would initially give the company a negative net worth of approximately $100 million.
''Moving out of those businesses will increase margins and make the company more profitable,'' said analyst John Stanish of Arcadia Investment Corp.
Cirrus' shares fell $0.41 to $7.28. The company unveiled the restructuring after the close of regular U.S. trading.
The company hasn't said when it intends to write off the restructuring charge, as yet, and the $500 million estimate might be reduced if it is successful in selling its modem chip business. It won't attempt to sell its graphics division, the company said.
The layoffs will be roughly split between the company's manufacturing and product development operations. The timing of the layoffs has not yet been announced.
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