Like firefighters battling a major blaze, communications IC suppliers are finding they may have to abandon some positions to save a larger chunk of their revenue base in a weakening economy.
Going by some of the drastic cost-cutting measures recently announced by several of these companies, many are likely to end this year significantly altered as they shed some less-profitable operations to boost margins.
As in any downturn, employees have been first to feel the heat. When Conexant, PMC-Sierra, TranSwitch, and Vitesse Semiconductor announced last week that they expect first-quarter revenue to fall by as much as 25% in some cases, analysts focused on their employee-reduction plans.
TranSwitch and Vitesse did not provide details, but Conexant and PMC-Sierra said they will trim their payrolls by a combined total of 1,880 workers. However, the job reductions only represent the first phase of a cost-cutting program the entire communications and networking equipment industry is embarking upon, according to industry executives.
"The slowdown in the global economy and the ongoing inventory correction is impacting virtually all of the communications end markets we address," said Dwight Decker, chairman and chief executive of Conexant Inc., Newport Beach, Calif., in a statement.
"As a result of this challenging environment and our deteriorating business performance, we are taking significant actions to align our structure and operating expenses with current and anticipated revenue levels," Decker said. "The steps we are announcing, though painful, are necessary to position the company for a return to profitability by the end of the calendar year."
Executives take a cut
Conexant is doing much more than firing some employees, however. The company's top executives will see a 10% reduction in their compensation this year. The company is also scuttling plans to float Mindspeed Technologies, its Internet infrastructure business [see story below] in an initial public offering, and will instead split immediately into two, thereby avoiding the high IPO costs. Additionally, the company is reviewing other units with the aim of selling or shutting them down.
Conexant said it is "exploring alternatives" for its digital imaging business, which could mean the possible sale of the unit. It also plans to exit the board-level subassembly business and may dispose of its El Paso, Texas, module assembly plant within the next three to six months. These actions will save the company approximately $200 million in annual operating costs, Conexant said.
Prepared to act
So far, Conexant's rivals have been more timid in their cost-cutting efforts. Vitesse would only say it is "taking a hard look" at its cost structure, although analysts expect the company to unveil details of the plans when it reports its quarterly results later this month.
On the other hand, PMC-Sierra said it will reduce its 1,740 worldwide staff by 13%, or 230 employees, but plans no further major changes besides closing a few design centers.
"Due to current market conditions, it's necessary that the company reduce a portion of its operating expenses," said Bob Bailey, chairman and chief executive of PMC-Sierra Inc., Burnaby, British Columbia. "However, given our reservoir of technologies, our strong balance sheet, and our continuing momentum with design win successes, we will be aggressively expanding our product portfolio."
PMC-Sierra may not need to cut costs as aggressively as its rivals. The company had $372.8 million in cash at the end of December 2000, and its gross margins will likely stay above 70%, or near its historical high, despite the current slowdown, according to analysts.
"While visibility remains low at this point in time, PMC-Sierra remains well positioned at the core of the network," said Arun Veerappan, an analyst at Robertson Stephens Inc., San Francisco. "It remains a critical and an enabling franchise player in the communications semiconductor industry."
TranSwitch, the Shelton, Conn., supplier of VLSI chips, may not be as well positioned. The company expects first-quarter revenue to slide 26%, to $38 million from $51 million in the fourth quarter of 2000. With less than $7 million in cash at the end of December, the company will need to cut costs substantially if sales fail to pick up soon. Analysts said they doubt the company can rely on the European and Asian markets as its statement indicated last week.
"We appreciate that TranSwitch has some top-flight customers in Europe who are involved with ongoing equipment rollouts at high-quality service providers," said Shekhar Wadekar, an analyst at Dain Rauscher Inc., Boston. "However, these customers cannot account for all of TranSwitch's international revenues, and we fear that if the current networking downturn does indeed spread to Europe and Asia, estimates for TranSwitch may be at risk."