Updated from April 24.

On a day when many tech stocks took a beating, hurt byweak GDP data and a sector downgrade of chip stocks bySalomon Smith Barney, shares of

AppliedMicro

(AMCC)

fared even worse. Afterdelivering an underwhelming earnings report yesterday,shares were off 35 cents, or 8.5%, to $3.79 in recent trading.

At Wedbush Morgan, analyst David Wu downgraded thestock from hold to sell, calling it "essentially dead"over the next six to 12 months. He thinks shareshave downside of around $3, below current cash value.Wedbush has no banking with AMCC, but Wu is long thestock.

"There were no surprises" in yesterday's report,he said in a note this morning. While he gives thecompany credit for aggressive cost-cutting, he saysit's not likely to break even for at least a year,given its heavy dependence on the wide area networkingmarket and reduced spending by telecom serviceproviders.

At Pacific Growth Equities, Jim Liang took asimilar stance, reiterating an underweight rating.Though AMCC's communications business is showingencouraging "signs of life," he thinks it's still anopen question when the company can get back in theblack. His firm has no banking business with thecompany.

In its fiscal fourth quarter, AMCC saw its losswiden dramatically from last year, reflecting a chargeto cover the reduced value of acquisitions. Thenear-term forecast was uninspiring, with the companyadmitting it will be lucky to hold sales flat in thequarter that's under way.

But on the plus side, the CEO said he's finallyseeing grounds for potential improvement as customersbring their inventories under control.

The communications chipmaker posted sales in linewith estimates at $20.1 million, down 33% from thesame period last year.

Net loss according to generally acceptedaccounting principles was $229.1 million, or 76 centsa share. Last year the company saw a loss of 30 centsa share.

The sea of red ink primarily reflects a $186.4million charge for impaired goodwill. AMCC also took a$1.6 million writedown for equity investments and a$1.8 million charge for restructuring costs related tolayoffs and a wafer fab closure.

Excluding those charges, AMCC lost $15 million, or5 cents a share, in line with Wall Street'sprojections.

While the fourth-quarter results were in line withthe company's own forecasts, CEO Dave Rickey said"they mark the end of what has been a verydisappointing year for the company and our industry."

Only two weeks ago the besieged communicationschipmaker announced it would

reduce the size of its workforce bya third by the close of 2003, to around 600 employees,the second big layoff in a year. Last summer it cut25% of its staff.

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AMCC said today that it will record another $20 millionto $25 million in the quarter now under way to coverthe costs of employee severance and facility closings.

On a more hopeful note, while market demandremains weak, AMCC suggested its prospects could seesome improvement in light of stabilizing businessamong its customers, the telecom equipment makers.

"We're relatively encouraged about thecommunications business for the first time in twoyears," said Rickey. "We've brought operating expensesdown, and customer inventories have declinedsignificantly."

He said customers' forward-looking inventories areapproaching 50 days, a 10-year low and a level halfthat of the Internet bubble era. Rickey saidcommunications chipmakers should stabilize and even grow as their customers draw down inventories.

AMCC gave a broad guidance range for the quarterunderway, predicting that sequential sales will beabout flattish, plus or minus 10%. Complicatingattempts to offer a forecast, executives said anincreasing amount of business comes fromcommunications orders that are placed and shippedwithin one quarter. "We would view flat as a bigachievement, given declining non-communications revenuewhich we have to overcome," said Rickey.

"We have no visibility on our revenues past nextweek," he added later in the call, responding to anyanalyst question about why AMCC is not buying backstock.

Though the chipmaker continually debates whetherto start buying stock, Rickey said, it views itsmassive cash balance of $1 billion as a competitiveweapon it wanted to keep as long as possible. "We'reunder a carrier capex cloud that has not diminished inmy opinion," he said, predicting 2003 capital spendingwill decline slightly from '02 levels.

Despite the still-ongoing capex cuts, AMCC'scustomers, the telecom equipment makers have actuallymade some positive noises this earnings season.

Leading customer

Nortel

(NT)

, which accounted for 11% of sales inthe March quarter, posted gross margin improvements inits just-ended quarter, as did

Lucent

(LU)

. Also today, the CEO of Nortel said heexpects more upside surprises than downside surprisesthis year.

Rickey acknowledged AMCC's competitors have done abetter job of diversifying beyond the telecomequipment market, in many cases through acquisitionsmade prior to the market downturn. He said the companywould like to make acquisitions, but is holding offuntil valuations drop further. "We have no intentionof overpaying. The biggest barrier is the gap inperceived valuations between ourselves and would-bepartners."

Rickey said "internal diversification efforts areunderway," but that it's too early to offer anydetails and that significant revenue likely wouldn'tbe forthcoming for at least a year. "I think there's aviable business in our existing market. The onlyquestion is how fast we can return to profitability,"he added.

AMCC has been mired in the red since the September2000 quarter.