Market Slowdown Delays Product Release at Vitesse By CARLOS MARTINEZ Staff Reporter Camarillo-based semiconductor maker Vitesse Semiconductor Corp. has decided to delay release of its 10 gigabit-per-second network processor, claiming the market is too weak for the device right now. Vitesse is only the latest in a series of semiconductor makers in recent months who have agreed to postpone development of the high-speed processor. IBM Corp. and Motorola Inc. have also backed off plans to develop their 10 Gbit network processor, saying there is little demand for it at the moment. The processor, which would ramp up the speed and efficiency of Ethernet networks, has seen demand slow to just a trickle as suppliers like Cisco Systems Inc. and Lucent Technologies Inc. and network operators like WorldCom Inc. and Verizon Communications Inc. have all moved away from the ultra high-speed devices. “We don’t really see the market for the 10 gig processor at all,” said Jennifer Goman, a spokeswoman for Vitesse, “and we’re not seeing that customers are really looking to make that jump to 10 gigs.” Although some of its competitors, like Applied Micro Circuits Corp., are delivering 10 Gbit devices to the marketplace, Vitesse said it has indefinitely postponed the release of its IQ510G chip, planned at one time for the third quarter of this year. The company said it would not abandon its network processing operations altogether, but will now focus on its slower IQ2000 and IQ2200 devices for the 2.5 Gbit optical connection market. “We’re not abandoning that market, but simply not putting as many resources into developing a product that doesn’t have a market,” Goman said. “It boils down to what the carriers are buying, and they’re simply not buying 10 gig devices.” Allen Leibovitch, an analyst with RHK Inc., said Vitesse’s decision comes amid reports that the company may be having trouble developing the 10 Gbit processor. “They’re realizing that they need to rethink their strategy on this processor,” he said. Vitesse, however, said the trouble is with the market, not its engineering. Jeremy Lopez, an analyst with Morningstar Inc., said the company has been hit hard by the tech downturn and needs to reduce its research and development expenses. “The company is not able to keep in step with the market. R & D; is accounting for 84 percent of their total sales and they can’t sustain that,” he said. For the quarter ending March 30, Vitesse spent $35 million on research and development, while reporting sales of $42.1 million. Net loss for the quarter was $44.4 million. That is a sharp drop from the same quarter a year earlier when the company reported a net loss of $11.2 million on revenue of $121.7 million. Other, smaller companies have moved forward with plans for their own 10 Gbit network processors, including Terago Communications Inc. and Fast-Chip Inc., both of which began to ship processors earlier this year. Firms looking to ship similar processors later this year include Intel Corp., Internet Machines Inc., Silicon Access Networks and Agere Systems Inc. Morningstar’s Lopez said they may be premature. “I don’t see a recovery any time soon,” he said. “WorldCom just cut their capital budget, companies are still not filling up their broadband capacity and it doesn’t make much sense to put product out there now.” Another sign of telecom gloom is the sharp 40-point drop in the Nasdaq Index over the past two weeks, propelled in part by negative announcements by WorldCom, which cut back orders, and Swedish cell phone maker Ericsson Inc., which reversed itself and said it may not turn a profit until next year. The two companies’ stock prices are down nearly 90 percent from their 52-week highs. During a conference call earlier this month, Vitesse CFO Gene Hovanec said he expects the company’s performance during the third quarter to be on a par with or improve upon that of the second quarter. Hovanec projected a pro forma loss of between 9 cents and 11 cents per share on revenue of between $42 million and $46 million. Analysts polled by Thomson Financial/First Call said they expect Vitesse to post a loss of 9 cents a share for the third quarter on revenue of about $45 million.