Egos, Big Bank Accounts Keep Comm-Chip Makers Single

Communications IC outfits have already withstood a world of hurt on the revenue side. In the past two years Applied Micro Circuits(AMCC Quote) has watched sales go into a tailspin, dropping 85% from the peak. Three other companies have all seen revenue shrink more than 70% from the peak.

How Far They've Fallen Revenues of Comm IC Suppliers, From Peak to Now
	Sales in Most Recent Quarter, in Millions	Sales in Peak Quarter, in Millions	Date of Peak Revenues	% Decline in Revenues from Peak
AMCC	21	143	Dec 2000	85
BRCM	296	340	Dec 2000	13
CNXT*	165	561	Sept 2000	71
EXAR	15	33	Dec 2000	55
PMCS	53	232	Dec 2000	77
VTSS	38	165	Dec 2000	77
*Note current sales level reflects the spinoff of Conexant's wireless business in June 2002. Source: Baseline

In a desperate bid to lower operating expenses, all the communications IC players have endured punishing rounds of layoffs and tried to restructure -- albeit halfheartedly in most cases.

One relative success story on that front, Vitesse(VTSS Quote), has drawn praise for diversifying its business away from the beleaguered long-haul telecom market.

In the most recent quarter it drew half its sales from storage customers, an end market with much healthier growth prospects. But even that hasn't translated to top-line improvement. In the most recent quarter, revenue at Vitesse still fell slightly below last year's levels.

For the most part, business across the comm IC industry remains mired in the dumps.

"The demand is poor, outlook is uncertain and the [chip] industry needs to consolidate before a significant upturn can happen," says Jim Liang, an analyst at Pacific Growth Equities. He argues that communications-chip outfits would benefit from merging R&D operations, which represent the biggest cost for companies that already outsource their chip manufacturing.

Downsizing, Take Two (or Three) Recent comm IC layoffs
Company	Date Announced	% of Staff	Number of Workers
Applied Micro Circuits	July 2002	25	275
Broadcom	November 2002	16	500
PMC-Sierra	January 2003	16	176

Plus, a thinning of the ranks would give surviving chip companies more pricing leverage with customers like Cisco, which has managed to expand its margins in the downturn by squeezing suppliers hungry for sales.

In short, the survival logic of business dictates that some comm IC suppliers either shut down altogether or merge, to slim the number of competitors.

Yet chipmakers have managed to stave off such unpleasant decisions. Probably the most important reason is that many have plenty of cash on hand after selling stock at premium prices in the boom years, and they carry minimal debt. Their financial cushion gives them plenty of breathing room despite the lousy business environment.