PMC-Sierra Tied to Telco Spending

PMC-Sierra, Inc. (PMCS - Analyst Report) designs and develops high-performance integrated circuits for the telecommunications and data networking industries. March quarter top- and bottom-lines beat the consensus estimate. The sequential increase in Q1 revenue was the result of stronger demand in Fiber to The Home (FTTH) and printer chips. The management expects Q2 revenues to be between $135 million to $140 million, or 8 to 12% revenue growth. We maintain our Hold rating and target price of $8.

The intense level of competition is pushing original equipment manufacturers (OEMs) to outsource development, which plays into PMC-Sierra’s strength. Another important trend is the growing need for broadband connectivity for wireless and wireline applications and the requirements of service providers to offer higher levels of quality of service.

The company expects to see a steady recovery through the remainder of the year on the back of a firmer market in three key growth segments: Telecom, FTTH and enterprise storage. However, 2008 appears to be the growth year for the company with the ramp of its new SAS and SATA products in enterprise storage. Overall, PMCS expects telecom to continue to grow, presumably in a more modest manner as optical metro, 3G and Asian markets in general steadily expand.

But roughly 50% of PMC-Sierra’s revenue comes from sales to the telecom market and, therefore, its prospects are tied to capex spending in that industry. Moreover, the company’s revenue stream is subject to significant volatility given the lumpiness of telecom spending.

The company has instituted a cost-reduction program to reduce operating expenses by $20 million to $24 million on an annualized basis. So far, PMCS has incurred another $4 million in restructuring charges for closure of two Canadian R&D facilities, 15% headcount reduction and asset write-downs.

Read the full analyst report on PMCS