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AMCC Kicks the Distribution Habit?

AMCC (AMCC) pre-announced a major shortfall in revenue for the March quarter and revised guidance for June down even further. The magnitude of the revenue decline is breathtaking – $76M in Dec ’06 to $70M in Mar ’07 to a projected $60M in June ’07. Analysts were projecting around $76M in June ’07 revenue.

The company notes a 30% decline in revenue recognized through distribution. They also failed to mention any customer of business reason for the decline. Naturally one can speculate that the revenue shortfall was due exclusively to a decline in revenue shipped through distribution.

According to the latest 10Q filed by AMCC, Avnet (AVT) accounted for 26% of quarterly revenue, or $19.8M or $76M in Dec 06 quarterly revenue. Assuming the shortfall was entirely with Avnet (which is a big assumption) this would result in Avnet based revenue dropping $6M.

Which is exactly what happened – AMCC quarterly revenue dropped from $76M to $70M, a $6M decrease.

An additional $10M reduction is expected to come between now and June-end. Given the lack of any end market or customer explanation (such explanations are usually nonsense anyway) I am left concluding that AMCC decided to kick the channel stuffing habit, something that I’ve been proselytizing companies should do. (click here for related articles)

This is extremely positive (provided you didn’t own the stock yesterday that is). It also opens up an interesting trading opportunity once organic revenue and steady state business resumes.

Provided no underlying issues exist with market or customer demand (networking has shown weakness industrywide) once the channel is flushed and shipments resume, AMCC gross margins should go up and revenue should return to previous levels.

So, for the first time in a long time, I am now the proud owner of an equity stake in AMCC. The conference call is next week and I will be listening.

Author owns and controls a long position in AMCC, VTSS, a short position in NUHC and no position in Avnet.

Discussion

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  1. I’m a little confused as to why you would buy AMCC under these circumstances. While not stuffing will make reported earnings more ‘real’, I think that a more tangible effect is that revenue variance will increase. As a result, the Beta for AMCC will increase. Average earnings will not increase to the same degree as there has been no underlying change in business, so the price of the equity must fall. Did I miss something?

    On the technical side, I thought that you wrote a really good piece on the Quake acquisition last year. At the time, it seemed that you were pretty bearish on the company. Has something changed in the business besides the topics discussed above?

    Posted by m@ | April 26, 2007, 2:20 PM
  2. My opinion on Quake is unchanged. Readers can search the archives for “Quake”. I believe that Mitch and I have agreed to disagree.

    Variance has indeed increased. To me that is good, not bad, provided you know the inputs to the variance. When variance is attenuated then knowledge of input factors is less important.

    AMCC is not without it’s problems but my opinion is the correction this week was excessive.

    Posted by Andrew Schmitt | April 26, 2007, 3:21 PM
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