Agere Systems Inc., still struggling to balance high operating costs against a severe decline in revenue, is not ruling out a heavier reliance on outside foundries for chip production.
A downgrade of Agere's credit rating last week to junk bond status may exert more influence on the company to outsource, according to analysts, though it appears unlikely it will ever be entirely fabless.
In an interview with EBN last week, Agere's president and chief executive, John Dickson, addressed a recent customer report that the Allentown, Pa., ASIC giant is in the midst of a transition that will shift all of its CMOS production to offshore foundries.
A fabless ASIC model is not in the company's immediate plans, according to Dickson, though a hybrid approach-one that would see Agere outsource mainstream processes and focus internal manufacturing on specialty chips-appears to be in the offing.
"It's hard to say if we intend to be fabless, or when," Dickson said. "But we don't see investing significantly in mainstream CMOS capacity as a priority.
"We've always been clear about our strategy of having substantial investments in foundries alongside our own fabs, and over time, investment in our own manufacturing will diminish," he said.
Dickson said Agere's manufacturing R&D activity centers on more exotic process technologies, like silicon germanium and indium phosphide, which command higher average selling prices and are better suited for use in high-performance communications systems.
Agere's stated manufacturing strategy has been to procure about 30% of its semiconductor production from outside sources. CMOS chips last year represented more than 70% of Agere's revenue, according to analysts.
While the downturn in the communications IC market has led Agere to pull back some of its outsourcing to fill its own fabs, the company may be forced to consider a reversal of strategy should conditions continue at current levels or worsen, analysts said.
Already stressed by $2.5 billion in bank debt-much of it taken on in the spinoff from Lucent Technologies Inc.-Agere received a further blow last week when Standard & Poor's cut its credit rating to junk bond status, potentially making it costlier for the company to borrow to pay back creditors or bolster its operations.
In its fiscal third quarter ended June 30, Agere suffered a $1.1 billion net loss as revenue declined 22% year-over-year, to $927 million. A total of $3.3 billion in cash reserves will work in Agere's favor for the near term, but farther out it's a different story, said Rick Black, an analyst at Blaylock Partners LP, New York.
"If the downturn is prolonged, there's going to be a need for companies like Agere to find other ways to decrease cost," Black said. Some of those ways might include additional layoffs, cutting or eliminating bonuses, pushing down R&D, reducing capital expenditures, or outsourcing, he said.
"A company like Agere has a lot of fixed cost in its internal manufacturing capability. It may become necessary for them to outsource more," Black said.
It's unlikely, however, that S&P's action by itself will accelerate Agere's outsourcing strategy, according to analyst Arnab Chandra of Lehman Brothers Inc., San Francisco.
Working in Agere's favor is its roadmap to more specialized technologies, such as those that will support the planned combination of optical and semiconductor components, Chandra said. "If you're just doing standard CMOS, you definitely need a lot of capital," he said. "For what Agere is doing, the capital needs are much different than, say, for an Intel." OR