PMC-Sierra posts weak projection on EPON growth

PMC-Sierra's stock was hit by 25% today, after it projected lesser growth in EPON revenues, one of the key technologies it had pinned its growth on. PMC-Sierra had bought Passave for $300 million last quarter. The EPON revenues in this quarter are $16 million, while the expected revenues in next quarter are $13 million.

According to a LightReading report available here, the problems seems to be from Japan, where NTT wants to use fewer Optical Line Terminals (OLTs). NTT has been deploying roughly one OLT per four subscribers but wants to use a one-to-eight ratio -- resulting in fewer OLTs in the short term. OLTs being the more expensive chipset compared to ONUs, yields better revenue and gross margins.

Passave's revenues have bounced around in the range of $10 million to $16 million per quarter for most of the past two years. So even though this past quarter was an all-time high, Passave doesn't seem to be showing the straight-line growth path investors were hoping for.

It seems that part of the problems in the slow growth of EPON is high competition (as many as three other startups: Teknovus, Immenstar, Centillium), and a very limited market in Korea and Japan. Because these chipsets are sold to equipment vendors and resellers, may lead to lesser gross margins.

Given that, the price of $300 million that PMC-Sierra paid seems to be sky high.