The explanations for the decline were painfully detailed. The company covered quarterly revenue by product line and provided explanations for each of the shortfalls. The revenue information was welcome as it allowed a clear picture of quarterly product trends to be assembled. I don’t believe this level of detail was possible without the explanation on Friday's call as it allowed some information gaps from previous quarters to be sewn shut.
Here are my takeaways:
• The core transport business is still in secular decline. AMCC has good products here and has invested while competitors have not. It must be near a bottom.
• The processor business had a massive shortfall. $8M of the $10M miss from April’s down guidance was this area as they expected to do $27M and ended up doing $19M. The company indicates almost all of this will come back, if you take them on their word. This is really the key question.
• The Quake business isn’t generating the revenue it was supposed to. CEO Kambiz H. indicated “Large Price Reductions” took place in Datacom - I assume this is Quake. I have also heard Aeluros is doing well in this market with their CMOS PHY. Perhaps this technology has made its way into other product lines, but the acquisition cannot be called a financial success. (see article from last year.)
• The storage market is an interesting long term asset. Kambiz referred to a competitor’s [assume Vitesse (VTSS.PK)] lack of commitment to Raid-on-Chip [ROC] and that customers are seeking a credible supplier.
Explanations for the decline from Q207 were provided. Each point in the excuse/product matrix had even more detail than listed below. This was a particularly painful part of the call, but I’ve tried my best to detail the data.
The objective of this exercise (I assume) is to identify what is coming back and what is not. After the ‘over-share’ of information, the company indicated that the existing design wins should generate a normalized $67-68M in revenue, which is what you get if you add back in all of the shortfall except for “End Customer Product Phaseout.”
There was extensive discussion about future wins. This is all forecasting, and I know from experience that such discussions are usually rife with confirmation bias. In order to understand the strengths of a company, you need to examine the losses alongside the wins.
Finally, the company committed to cut quarterly Opex 10% from $40M to $36M.
AMCC’s business now sells for less than Vitesse, which makes no sense to me given the risk still present in the situation there. Regardless of the detailed explanations, I firmly believe the company egregiously stuffed the channel and is in the process of correcting that mistake.
I know that AMCC has very good transport products and should be leveraged to any improvement in the Metro WDM space.
The storage business would be attractive to outside parties as this area is in a period of heightened M&A. Consolidation of suppliers provides a tailwind to all remaining participants. Either situation should be positive for AMCC.
The processor business is extremely competitive and perhaps AMCC can find a niche (Wimax CPE and Printers don’t sound like the same niche). Companies like Cavium (CAVM), Broadcom (BRCM) and Marvell (MRVL) have very successful category killers. AMCC needs a category killer and I don’t know what it is.
AMCC is the poster-boy for communication semiconductor industry consolidation, a core Nyquist thesis. Its three product lines of roughly equal size do not share common customers at they system level and there are few efficiencies gained from keeping them together. Vitesse, Mindspeed (MSPD), and PMC-Sierra (PMCS) share the same structure. The combination of one or more of these entities is logical. Given AMCC’s large cash position and healthy balance sheet, they could fill the role of consolidator. Or as a caller from SAC Capital indicated, someone else might do it for them.
Disclosure: Author is long AMCC, holds an immaterial VTSS short position and has no position in any of the other companies mentioned.