Agere Systems: Positive spin

Having completed its spinoff from Lucent, Agere charts its own way forward

-- Movers and Shakers, 8/15/2002

Created in March 2001, on the eve of the worst downturn in recent memory, Agere Systems has faced a rough ride from the start. But with its separation from parent company Lucent, which should be complete by the time you read this, and strong demand in markets such as wireless LANs, the maker of ICs and optical components is moving ahead with optimism.

John Dickson, President and CEO, Agere Systems

Agere sells more communications components than any company in the world, with optoelectronic products that transmit, process, change, amplify, and receive the light that carries data and voice traffic over optical networks. It sells products globally to the leading manufacturers of communications and computer equipment.

The Client Systems Group, which targets the end-user computing and wireless markets, represented about 60 percent of the company’s total revenues in the second fiscal quarter of 2002. Wireless data offerings  (specifically 802.11 wireless-LAN devices and storage ICs) comprise Client Systems. The Infrastructure Systems Group includes components for optoelectronics and ICs used in communications networking equipment.

Agere was created in March 2001, when parent company Lucent raised $6 billion by selling 43 percent of its shares to the public and held onto the rest. The timing couldn’t have been much worse. Faced with a weakened US economy, Agere decided to sell its wafer fabrication plant in Orlando, Florida, and cut 1100 workers there. Over 18 months, it has also combined IC and optoelectronics operations from two shuttered sites in Pennsylvania into its Allentown campus, cutting an additional 300 workers and shifting 350 to Allentown. In 2001, Agere let go of a total of 7000 workers, mostly in manufacturing.

Things picked up in January 2002, with revenue reaching a better-than-expected $551 million, an uptick of 2.6 percent. The Client Systems Group—representing 60 percent of Agere’s total sales—was up $51 million or 19 percent from December 2001, with wireless-LAN and storage offerings posting double-digit revenue growth. However, the Infrastructure Systems Group, which serves the network equipment market, reported revenues of only $226 million in Q1 2002, down $37 million, or 14 percent, from December. With telecom companies still hurting, orders were delayed.

“Everybody in this space has been going through a rough time,” says Raj Srikanth, a managing director with Deutschebank Securities Inc. “The problem is that they’re at the end of the food chain.” With 80 percent of Agere’s business in ICs and 20 percent in optical products, “both businesses have been affected.”

“With the spinoff behind us, we will be able to forge even closer relationships with our customers and we will be able to focus freely on our future.” Greg Waters, Senior Vice President, Strategy and Business Development, Agere Systems

“Agere has been struggling tremendously, but slowly things are coming together,” Srikanth says. “Right now, because of their association with Lucent and their end markets collapsing, their stock price has been sinking. But the good thing is that they’ll soon be on their own.”

Agere agrees that the spinoff will erase some concerns. “We do not expect our spinoff from Lucent to impact our day-to-day operations, because we have been operating as an independent company since our IPO in March 2001,” says Greg Waters, Agere’s senior vice president of strategy and business development. “The full separation, however, will remove concerns about strategic conflicts that some of our network-equipment customers have expressed in the past. With the spinoff behind us, we will be able to forge even closer relationships with our customers and we will be able to focus freely on our future.”

Good news in the first quarter of 2002 included doubling the number of design wins from the previous quarter, to such companies as Cisco, Tellabs, and Alcatel. Almost two-thirds of these wins were scored with the company’s top 30 customers. In the Infrastructure business, about half of the wins came in the metro-core and access areas, while in Client Systems, more than one-third were in the storage and wireless-LAN markets.

In April, Agere signed a five-year supply agreement to make custom ICs for DataPlay, a Boulder, Colorado-based developer of a miniature digital disks that can be used in music players, digital cameras, e-books, and PDAs. Agere’s laser diode driver enables DataPlay’s micro-optical engine to accurately read and write the DataPlay digital media by supplying an adjustable current that varies according to whether the driver is operating in the read or write mode.

Nathaniel Cohn, an analyst with Goldman Sachs, applauds Agere’s move. “That could be a very nice incremental growth driver for them,” he says.

“Although our supply agreement with DataPlay may have very little immediate financial impact on our overall business,” Waters says, “the contract demonstrates our commitment to providing technology, flexibility, and value to our customers as we look to expand our storage-IC leadership from the desktop to the consumer-electronics marketplace.”

“Agere has been struggling tremendously, but slowly things are coming together. The good thing is that they’ll soon be on their own.” Raj Srikanth, Deutschebank Securities

But the biggest news for Agere is its spinoff from Lucent Technologies on June 1 of this year. “The whole strategy of spinning off Agere is useful,” Cohn says. “It did hurt them to be associated with Lucent,” partly because Agere was selling chips to such Lucent competitors as Nortel and Cisco. “To eliminate that as an issue will allow them to work more closely with OEMs, but it also gives them from the start the strength of Lucent’s knowledge of the industry.”

“The transaction is a very good thing because the commitment to growth [with Lucent] isn’t the same,” Cohn continues. “This will definitely help them to focus as a standalone company.”

Business will pick up in 2002, Cohn predicts. “This company has a lot of diversity in the markets it serves.” Ongoing demand for wireless-LAN, storage, and PC-peripheral products, “is helping them weather the storm,” he says.

Srikanth agrees that Agere’s 802.11b chip, a “red-hot” product being used extensively today, will revive its fortunes. “They’re also working on a next generation of [wireless-LAN] chips. That’s a good business to be in.”

Yet Agere’s very source of strength is something of an Achilles’ heel, Cohn notes. “It also presents a challenge for them to figure out which markets, long-term, will be critical to their success. They face many competitors in each of these market segments, and that’s a lot to keep on top of.”

Despite the rollercoaster ride Agere has endured, President and CEO John Dickson and his management team win kudos from Cohn. “They’ve done a great job,” he says. “The company went public just at the time when their business headed into one of the worst downturns ever experienced.”