AMCC: Fundamentally sound
Downturn doesn't worry CEO of well-positioned telecommunications chip provider.
By Caitlin Kelly -- Movers and Shakers, 6/15/2001
| AT A GLANCE | |
| AMCC |
He’s definitely not known for diplomacy. When the price of AMCC (American Micro Circuits Corporation) shares dropped by almost 15 percent overnight after an article in The New York Times reported that he had sold more than 99 percent of his stock since 1999, AMCC CEO Dave Rickey, a gravel-voiced 45-year-old, blasted the “bastion of liberal middle-class status quo” and its “two-bit writer.”
AMCC stock dropped by $2.39 to close at $14.11 on April 2, 2001, after the story appeared on the front page of the Times business section.
Rickey also minced no words during a CNBC appearance with anchor Maria Bartiromo. “I dare you not to own my stock,” he said. “I’m a kind of gutsy guy and I have a lot of confidence in what we’re doing.” CEO since 1996, Rickey first joined AMCC in 1993 as the vice president of operations and rejoined as CEO three years later after a stint as vice president of operations at NexGen.A 22-year-old San Diego-based company, AMCC designs and manufactures high-performance telecommunications chips used in fiber-optic networks. In 2000, the company recorded revenues of $172.4 million and net income of $48.6 million.
The firm has made seven acquisitions in the past two years, including MMC Networks, bought in 2000 in a stock swap valued at $4.5 billion, the second-largest chip merger ever. The acquisition turned AMCC into a one-stop shop for communications chips used by makers of large networking gear. In an age when time-to-market is so critical, such one-stop shopping can save OEMs significant time.
Focusing on telecom is the right thing to do, says analyst Alfonso Velosa III, associate director with Gartner Inc, who says that in the next two to three years demand will continue to remain strong. “There’s a good market for wireless communications,” Velosa says. “This will still be the best market and the one offering the best profit margins.”The firm’s biggest customers are Nortel (18 percent) and Cisco (10 percent), with Alcatel in third place, followed by Lucent, Sycamore, Juniper, Ericsson, Hitachi, and others. “The network is driven by demand for increased speed,” Rickey says. “We’ve got 40-gigabit hardware out, while some of our customers are still in product development. Three years ago, people said you couldn’t even do it.”
Rickey says AMCC will supply chips for the entire gamut of next-generation 40-gigabit products. “Silicon is a slow technology, but we got our recognition by doing this,” he says. “It’s our niche. We have great analog, digital, and chip-design skills, which is the core competence you need to do this.”
Major acquisitions have included the purchase of Cimaron Communications of Andover, MA, in March 1999, “pre-revenue.” The company, a leader in high-bandwidth silicon connectivity products, added framer and mapper expertise, allowing AMCC to move past analog physical-media devices and mixed-signal physical-layer devices to a digital layer for network protocol. “It’s been huge for us,” earning AMCC $30 million per quarter, Rickey says.
However, Rickey admits that 2001’s first quarter was terrible, again stating the situation in no uncertain terms: “Our business has definitely been crappy. Customers stopped ordering.”
But panic is not in order. “My philosophy is to power through it,” Rickey says. For starters, the company boasts $1 billion in cash reserves. “We did $150 million last quarter,” Rickey says in a mid-April interview. “I’m not worried about running out of payroll.”
While there’s no question that the industry is in a slump, thanks to decreased demand and inventory overload on the part of OEMs, Rickey is not worried. “My view is that people are using the Internet as a communications tool,” he says. “If there’s a recession, will people stop using Palm Pilots?”
“Our customers are all pushing back,” he admits, “but at the end of the day the demand is still for bandwidth.” To weather the current storm, Rickey says AMCC will focus on working closely with its customers to design analog and mixed-signal chips.
 |  |
| Dave Rickey |
Rickey is well aware of his competitors, such as Vitesse Semiconductor and PMC-Sierra. “I’m paranoid as hell,” he says. His response? “We used to sell chips. We now sell time-to-market. We want to be an extension of our customers’ engineering.” Rickey says AMCC can now design and produce a complex chip within nine months—down from 24 months. A simple chip can be done in six months, thanks to increased design automation, more modeling, and simulators, he says.
Rickey says the company works on cultivating hundreds of customers at any given time. “Five years ago, five guys dominated the world of communications,” he says. “We need a lot more customers now because we don’t know who the winners are going to be.”
Analysts share Rickey’s confidence in AMCC. “In 1999 and 2000, they were growing like gangbusters,” says Jim Feldhan, president of Semico Research. “Their products fit into the communications infrastructure, and we’re very optimistic about the future of that, although this year doesn’t look like a very good year.” Some of the end applications, like wireless were “overhyped by just about everybody,” Feldhan says, and the expectation was for “continuing hypergrowth.”
What has hurt AMCC, as well as many of its competitors, are what Feldhan calls the “dot-bombs.” “Many of them had unreal expectations and a lot of money,” he says. “The first thing they’d buy was switches, routers, and servers to support their Web site.” Today, says Feldhan, brand-new $50,000 servers, unused, can be found at fire-sale prices of $5,000 to $8,000.
In other words, the industry has sneezed, and AMCC has caught the cold, Feldhan says. “There’s nothing wrong with their products or their strategy,” he adds. “They’re in the same boat as the industry.”
Feldhan sees new markets for AMCC in China and Japan, where Internet infrastructure is developing. “There are a lot of opportunities in these countries,” he says. “Companies like AMCC have an advantage because they have a very good product and there is no local solution. The Japanese have focused on pure digital circuits, not programmable logic. That’s uniquely American.”
Feldhan also echoes Rickey’s assertion that demand for broadband is not going to diminish. During the downturn, focusing on design will help, he says—smaller boxes, lower power, less heat. “AMCC is in a good position as we move forward, but will have to wait for Lucent and the others to produce new models.”
