AUSTIN, Texas Few companies have survived the telecom downturn with more lessons learned than Legerity Inc., which spun out of Advanced Micro Devices Inc. in August 2000 just as the voice telephony market went into a deep freeze.
Legerity's subscriber line interface circuits (SLICs) and subscriber line access circuits (SLACs) were mature products in a traditional telephony market that remains flat at best.
Now, with voice-over-Internet Protocol (VoIP) finally beginning to take off, Legerity is fielding new silicon into the "derived voice" market and expects to return to profitability early next year.
Hank Perret, who joined as chief financial officer in 2001 then took over as CEO last November, said that as part of the spin-out Legerity saddled itself with a "take or pay" agreement with AMD, a deal forged in the midst of the telecom euphoria.
"When the company was formed in mid-2000, there was a feeling that the wonderfulness was never going to end," said Perret. Capacity was tight then, and Legerity signed an agreement with AMD to take wafers at a rate that would accelerate up to $400 million to $500 million a year.
Months later, when the telecom market crashed, the pipeline was jammed with inventory held by Legerity, and by its customers and distributors. At the end of 2001, Legerity itself held more than two years of inventory, worth $100 million.
Legerity was faced with giving AMD a check every month for products it could not sell, and something had to give. AMD offered to sell Legerity the two aging AMD bipolar fabs in Austin that supplied Legerity with its high-voltage bipolar parts. Instead, Legerity decided to go fabless. It paid AMD a substantial sum to get out from under the take-or-pay agreement and looked for other manufacturing sources.
Legerity told customers it was killing some products, and gave them a chance to stockpile those parts with "last time buys." The surviving bipolar product lines were to be shifted from AMD's fab to Chartered Semiconductor's oldest facility, Fab 1.
Legerity told its customers there would be a "dark period" from the time AMD shut down its fabs, in June of 2002, until the time the products were qualified on the process at Chartered, expected in February 2003. Legerity asked customers for nonrefundable, nonreturnable purchase orders for these buffer stocks. Those customers, faced with little demand and no visibility into future markets, wanted to take product as late as possible while Legerity wanted to get as much inventory off its books as it could.
Then Legerity made a bold move, buying share in the mature wireline voice telephony market by acquiring Agere Systems' voice interface solutions division for about $70 million.
As part of the deal, Agere wanted to sell Legerity a '50s-vintage fab in Reading, Pa., that made Agere's bipolar parts. As it had earlier with AMD, Legerity declined and went to Agere's customer list with its plans to shift production to Chartered's Fab 1.
In January 2003, just as the bipolar process at Chartered's Fab 1 was finally being qualified, Chartered said it was shutting down Fab 1, a six-inch facility, and moving production to a newer 8-inch wafer fab in Singapore.
"The good news was that we would go from 6-inch to 8-inch wafers," said Perret. "The bad news was that we had just got the process qualified, our customers had just gotten their boards qualified, and then they told us they were going to shut down Fab 1. And bear in mind that every time our customers have to requalify, it opens our sockets to competition."
To complicate matters further, Sony, which had taken over an AMD bipolar fab in San Antonio, Texas, in the early 1990s where some Legerity products were made, decided to close the San Antonio fab. "Normally, a supplier shutting down a fab gives the customer six months. Sony said they would give us six weeks. We could not possibly go to our customers with that, so we managed to make that three months," Perret said. The bipolar parts made in San Antonio were shifted to production in Singapore.
Agere made a line of codecs at its Orlando, Fla., fab primarily for its former parent, Lucent Technologies, but supplied others to Legerity. Earlier this year Agere told Legerity that it would stop making the codecs and convert that capacity to newer, more-profitable products. Perret said Agere told Legerity that it was "going to slap us with an additional 50 percent price increase on stuff we want to order" from Agere before the line was converted. Legerity now makes CMOS codecs at United Microelectronics Corp. in Taiwan. Its bipolar products will be qualified at Chartered in the second quarter.
"We went through a whole series of abnormal experiences, things that took a lot of our resources and which involved a reasonable amount of pain," Perret said. Meanwhile, Legerity's engineers were redesigning existing products, shrinking die sizes by 30 to 50 percent. Coupled with the economies of moving to 8-inch wafers, Perret said, Legerity will gain 15 to 20 points of margin between the first half and second half this year. Inventory has come down by one-third, and because most of it is aimed at the mature subscriber line market, it has a long shelf life.
Legerity laid off roughly half its employees over a 30-month period, going from 425 down to about 215.
Last December, the company went from a product line organization, with directors of engineering and marketing for each product line, to a leaner organization with one head of engineering, and one for marketing. Former CEO Ron van Dell, who earlier worked at Dell Computer here, resigned in November.
By the third quarter, Perret estimates, operating expenditures will be about half of what they were in 2001. Last year, revenues were in the $90 million range, and the company's goal is to grow revenues each quarter this year, achieving profitability next year. If all goes well, Legerity could launch its initial public offering late in 2005, he said.
Beyond voice telephony
Last year, as much as 85 percent of Legerity's business came from the SLICs and SLACs for voice network access that it sells to the world's 25 largest phone companies. This year, Perret estimates, legacy voice products will decline to 60 to 65 percent of revenues, with VoIP accounting for roughly a third, and "high-performance analog" making up the rest.
"We want to diversify more out of voice telephony, so the vagaries of that market cannot swing the company like it has in the past," Perret said.
The goal is to identify product opportunities in the enterprise and consumer analog markets that build on Legerity's strengths: its high-voltage bipolar process and analog design team.
"We are at an inflection point for the company, looking to remake ourselves and get into some other things. We are very serious about diversification, with a goal of having 30 percent of our engineers working outside of voice telephony by the end of the year," he said.
Legerity's growth depends largely on how fast VoIP develops. In two years, the company has seen one false start. The market for voice-over-cable had a brief spurt in the last half of 2002 as Comcast rolled out services based on constant bit rate (CBR), rather than Internet Protocol, technology. Then, the 2003 merger of AT&T and Comcast resulted in a change in corporate direction and "a lull" for CBR products, he said.
Legerity's engineering staff has been working with scores of now-emerging VoIP services, ranging from well-known companies like Vonage and 8x8, to dozens of Asian startups with relatively little analog engineering expertise.
Legerity's near-term VoIP prospects depend on how the Federal Communications Commission regulates "derived voice." While Legerity is "agnostic" in that its VoIP offerings support cable, DSL and other broadband pipes, growth in the market depends partly on a largely hands-off regulatory policy.
With newly designed chips now sampling or shipping to the growing VoIP market, and its manufacturing strategy seemingly back in order, Perret said "we think everything is coming together for us at about the same time."