Networking sector takes turn for the worse A week in June filled with bad news from four of North America s largest fiber-optic equipment companies has dashed hopes for an early recovery in the networking sector (see ). On June 15 Nortel Networks said it will report a staggering second-quarter loss of $19.2 billion for the June quarter, on revenue of $4.5 billion. The loss from operations will be around $1.5 billion; the remainder of the damage comes from restructuring costs. Nortel will also lay off an additional 10 000 workers, on top of the 20 000 layoffs previously announced. Inventory problems at JDSU The Nortel announcement followed hard on the heels of a similar warning from JDS Uniphase, which cut its sales forecast from $700 million to $600 million for the June quarter. Executives said that sales for the September quarter would likely plummet to $450 million. The company also said it expects to post a loss of $80100 million for the June quarter, excluding one-time charges, amid record inventory write-downs. Wall Street had been expecting a profit of $65 million, and revenues of $690 million. The inventory write-downs are expected to total $225250 million. JDSU typically reserves a six-month supply of components and modules for manufacturing. Excluding those write-downs, JDSU said it would likely have recorded a fourth-quarter profit. Lucent and Corning also struggle Earlier in the week, the ratings agency Standard & Poor s cut Lucent Technologies debt rating to "junk" status after finding "significant uncertainties" about Lucent s ability to turn around its business. The move is another humiliating blow for Lucent, coming so quickly after a proposed merger with Alcatel was undone in the eleventh hour. However, the downgrade was not a huge surprise to the bond market, which has been trading Lucent debt at junk levels for at least six months. And, finally, Corning was also on the receiving end of some bad news in this memorably bad week. Analyst Steven Fox of Merrill Lynch grabbed headlines when he downgraded his recommendation for the company using the vivid phrase "nuclear winter" to express his belief that the next few quarters will be "below even our worst-case scenario". Is this the bottom? When the telecom equipment slump set in several months ago, there were many predictions that it would reach its nadir in mid-2001. Recovery was expected to begin once built-up inventories were exhausted. But, in the absence of any evidence suggesting that the telecom carriers are ready to begin spending again on new networks, a new consensus is building that this sector will remain weak for several more quarters, with recovery beginning in early 2002 at the earliest. There was a noticeable change in tone among Nortel executives in their June 15 conference call with investors and analysts. For example: while they were willing to say that the slimmed-down company could turn a profit, with $5 billion in sales per quarter, they absolutely refused to predict when they might achieve that revenue figure disturbing when you recall that their worst quarter in 2000 saw $6.33 billion in revenues. CEO John Roth said the telecom sector is being hit by more than just an anomaly in demand and inventory patterns, and that it has to adjust to lower sales figures. "We re experiencing a very significant reduction in sales in the industry and, in our case, optical long-haul networks," Roth said. "We are focusing on getting our cost structure in place and going forward." "Carriers have shifted away from last year s renovations of their networks to a make do with what you have approach," said Steve Kamman, a telecommunications analyst with CIBC World Markets. "We believe this shift supports our expectation that carrier capital spending will drop by at least 5%, and more likely 10% this year, with the likelihood of further cuts in 2002." Nortel executives supported that view in their conference call. CFO Frank Dunn cited the example of one customer who initially planned to order around $350 million worth of equipment. But as engineers worked on the network, they were able to expand its capacity with less-extensive renovations, and ended up ordering only about a quarter of that amount. Some analysts do see bright spots, such as the consumer broadband area. Kamman said that the current outlook "does not condemn this industry to eternal damnation." He predicts: "A massive return to spending once we reach critical mass in US residential broadband, which we expect to occur in the latter part of 2002." Nasdaq bears the brunt The cumulative effect of all this bad news contributed to the worst week the Nasdaq stock market has seen so far this year. Reuters calculates that so far this quarter, 498 companies have said their earnings would fall short of expectations a five-fold increase from a year ago. Nortel dropped 74 cents to $9.86, and JDSU sank $1.37 to $12.44 after their warning. JDSU shares, among the most active on Nasdaq, had earlier sunk to a fresh 52-week low at $10.81. Shares of Corning dropped by 8% to $16, a new 52-week low, and shares of Lucent fell from $8 to below $6.50. In the past 12 months the market capitalization for Lucent has dropped from $295 billion to just under $22 billion. Optical components market to decline 11% New forecast data from telecom market research firm RHK shows that worldwide spending on optical components used in terrestrial DWDM and optical networking applications will decline 11% in 2001. RHK has been forced to revise its data in light of the recent market turmoil in this sector. Six months ago, RHK predicted that sales of optical components would increase from $5 billion in 2000 to just under $10 billion in 2001, and would continue rising rapidly, reaching $24 billion in 2004 (see ). Now, the company estimates that sales will fall to $4.45 billion in 2001. Looking further ahead, a return to growth is expected in 2002, but at a slower rate than experienced in recent years. The revised 2004 figure is now close to $14 billion. Despite the "hiccup" in 2001, RHK s figures still represent a compound annual growth rate from 2000 to 2004 of 29%. The slowdown this year has been blamed on excess inventory levels, which were brought about by over-purchasing last year as systems OEMs desperately tried to secure supply. A slowdown in network construction and reduced spending by telecommunication carriers worldwide has contributed to the decline. As the excess inventory works through the system this year, demand will pick up to double-digit growth rates in 2003 and 2004. Growth will be driven by an increase in the number of functions performed optically rather than electrically, deployment of new systems, and higher-performance, higher-priced, next generation components. Different product groups are predicted to grow at different rates as some carriers shift emphasis from building new networks to lighting additional channels on existing networks. One product category expected to do well from this shift is lasers and photodetectors. RHK forecasts this product group to grow from $2.7 billion in 2001 to $6.6 billion by 2004. Vitesse unveils in-house 40 Gbit/s indium phosphide process Vitesse has unveiled a 1.0 m InP HBT process designed for analog and digital chips used in next-generation 40 Gbit/s optical networks. The process will be used to manufacture physical layer ICs for SONET OC-768 applications and circuitry for 10 Gbit/s systems employing return-to-zero encoded data. Vitesse expects succeeding generations of the process to be scalable to ICs with operating speeds up to 100 Gbit/s. The new process employs a vertical, mesa-isolated NPN bipolar transistor with a demonstrated peak cut-off frequency ft of 150 GHz, and maximum oscillation frequency fmax of 160 GHz. This performance is consistent with the bandwidth requirements of circuits operating at 4050 Gbit/s, and also allows forward error correction. Vitesse believes the extra margin afforded by InP HBTs offers an advantage over competing technologies. Vitesse s InP roadmap According to Alan Huelsman, Vitesse s InP program director, the first products are expected to be available for sampling early in 2002. These will be 43 Gbit/s front-end receive chipsets. First iterations will integrate the clock data recovery and demux circuits in one IC, with PIN detector, TIA and limiting amplifier making up the three other requisite ICs. The first working circuits, which include an integrated 43 Gbit/s VCO (see ) and 2:1 demux chip, are now being characterized, says the company. Later generation devices are expected to consist of a two-chip solution one IC will integrate a PIN detector with a TIA, while the other will combine limiting amplifier and demux functions. This will be followed by receivers with all functions integrated onto a single InP chip. By 2003, the aim is to produce a receiver with a 3.3 V operating voltage and power consumption of around 2 W. "InP is the only IC technology that combines the high-frequency performance and high-breakdown voltage required to implement all transmit, receive and clock recovery functions for 40 Gbit/s systems," says Alan Huelsman. "All other IC technologies result in compromises in system performance or complications in architecture for thermal or functional partitioning reasons. In addition, InP is the only IC technology that provides a path to monolithic integration of long wavelength optical sources and detectors." Vitesse began development of InP HBT processes at the beginning of the year using its 4 inch GaAs production line in Camarillo, California. About 50% of the current line has been converted to InP wafer processing. The company says it is also considering offering foundry access to strategic partners. Further reading "Vitesse has a Versatile approach to modules" see Fiber News, page 16. "Optical networking components gear up for 40 Gbit/s and beyond" see page 77. "Vitesse execs feel your pain" see Portfolio, page 101. Microsemi and Cree work on SiC devices Microsemi (Irvine, CA) and Cree Inc have signed an agreement to jointly develop and commercialize SiC Schottky diodes. The agreement is intended to allow Microsemi to accelerate its SiC program, which will employ Cree s high-power SiC Schottky diodes in Microsemi s patented Powermite packages. While the collaboration focuses on development, both companies expect to negotiate further agreements for volume sales (see ). The ability of SiC Schottky diodes to handle both high voltages and very high power densities offers advantages over other materials such as GaAs and Si for applications including switching power supplies and telecom rectifier diodes. "Microsemi has demonstrated a leading position in high-density, high-power packaging," said Chuck Swoboda, Cree s president and COO. "Combined with Cree s SiC chip technology, we believe this relationship will prove beneficial in developing SiC Schottky devices for high-volume applications, and enable initial penetration into the power device market." Microsemi upgrades Schottky diodes Microsemi has unveiled two SiC power Schottky rectifier diodes for operation at 100 and 200 V. The company says the new devices address mechanical reliability and electrical variances uncovered in its initial products, announced early in 2000. Until the alliance with Cree, Microsemi worked with university R&D groups to develop commercial SiC diodes. The company s first devices were developed with Cree and SemiSouth, a spin-off company of Mississippi State University. Cree provided 1 and 2 inch SiC wafers, and SemiSouth performed the processing. "I believe we ve overcome some of the final hurdles required to commercialize a line of SiC Schottky devices in our Powermite packages," said Manuel Lynch, vice-president of marketing and business development. "We started this project two years ago, but recently have seen accelerated progress due to the higher quality of available SiC substrates and the improvements in the device fabrication process." Job cuts and mounting losses at Anadigics On June 11 Anadigics announced that it was laying off 10% of its workforce about 65 employees in response to the worsening conditions in the communications semiconductor market. The company also said that it would post a larger-than-expected loss in the June quarter. A previous warning had been issued in March. "Current market conditions that are impacting the visibility for the company and the industry at large, as well as our efforts to return to profitability, necessitate these actions," president and CEO Bami Bastani said. In addition to the layoffs, Anadigics is also restricting travel, eliminating temporary personnel, and consolidating manufacturing shifts. These moves are expected to produce annual pre-tax savings of $57 million. The company will take one-time charges in the range of $3537 million, and will also post an operational loss of around $13.2 million. Wall Street had been expecting a loss of $7.25 million. Anadigics said broadband cable is currently its strongest segment, with sales of chips for set-top boxes outpacing cable modems. Company executives held out hope that the wireless segment might begin to recover in the third quarter; however, their conference call was held the day before Nokia revealed a more pessimistic forecast for handset sales (see next page). Anadigics third product area, fiber-optic products, is not expected to rebound until the end of the year. The company indicated that in the September quarter they expect some increase in sales of broadband products, with fiber-optic products flat to slightly down; wireless sales will be flat to slightly higher. RFMD hit hard by bad news from Nokia On June 12 Nokia sprung a surprise on the world s markets by issuing a major profit warning. The world s largest maker of mobile phones (see page 27 for updated market share information) said lower than expected cell-phone growth would cause an earnings shortfall. Sales for the June quarter are now expected to grow less than 10% compared with earlier estimates of 20%, due to deterioration in the general market and economic uncertainty. Nokia, which controls more than 35% of the handset market, said it would revisit its outlook for the second half of the year too because the market slowdown was expected to continue having an adverse effect. Updated estimates will be given in mid July. Nokia shares tumbled nearly 19% on the news, and they took all of their competitors and most of their suppliers down with them. Among the hardest hit was RF Micro Devices, whose shares slid 25%. Nokia accounts for between 5060% of RFMD s revenues. RFMD s chief financial officer Dean Priddy told Reuters Nokia s revised forecast will not affect his company in the short term as it is experiencing a strong June quarter. Priddy stood by RFMD s previous earnings and sales guidance, including an expected net loss of about 5 cents to 6 cents a share, with around 20% in growth over the March quarter. RFMD reported revenues of about $55 million in the March quarter. Hitachi and TRW to develop InP modules for 3G wireless and fiber networks Hitachi and TRW have announced two separate agreements to collaborate in the development and manufacturing of InP modules. One venture will focus on PA modules for 3G handsets, while the other is targeting 40 Gbit/s fiber-optic transceivers and involves OpNext, a newly formed optical component company majority-owned by Hitachi (see Compound Semiconductor Sept/Oct 2000, p43). PA modules for 3G wireless Power amplifier modules will be built by Hitachi using InP devices manufactured by Velocium, the subsidiary of TRW focusing on InP- and GaAs-based products (see Compound Semiconductor June 2001, p 7). Both companies will participate in the design and development of the modules, contributing existing designs and developing new ones. The first PAs should be available to handset OEMs in early 2002, with production ramping up to meet the demand from the expected mass commercial launches of 3G services in the second half of 2002. The new PAs are integral to the development of W-CDMA handsets for 3G, the next generation of wireless communications, enabling Internet access and high-speed data communications. The roll out of 2.5G and 3G services to replace the poorly received wireless access protocol (WAP) has been slower than expected. 3G wireless services are expected to give great improvements over WAP services and hence boost ailing handset sales as subscribers upgrade. According to Gartner Dataquest, 3G phones will account for 10% of all wireless handset shipments by 2005. InP offers a number of performance improvements over GaAs PAs, giving over 50% power efficiency and the improvements in signal quality that are needed for W-CDMA applications. "Hitachi s manufacturing capability, coupled with our advanced InP technology, will enable volume manufacture of wireless handsets with talk times and performance never before available," said Dwight Streit, Velocium s president. InP devices for 40 Gbit/s transceivers Velocium and OpNext will collaborate in the development and production of components for OpNext s OC-768 (40 Gbit/s) fiber-optic transceivers. OpNext currently produce 2.5 and 10 Gbit/s transceiver and laser diode modules. Velocium will supply InP-based devices such as amplifiers and laser drivers for the OpNext transceivers, planned for launch in 2002. First deliveries of the new Velocium components are expected later this year, with higher volume shipments building in 2002 as OpNext prepares for the implementation of 40 Gbit/s systems.