Applied Micro Circuits

(AMCC)

Recommendation By:

Christopher R. McCall

17 October 2000

Business Summary

AMCC designs, develops, manufactures, and markets high-

performance, high-bandwidth silicon solutions for the world's

optical networks. The Company utilizes a combination of design

expertise and multiple silicon process technologies to offer

integrated circuit products that enable the transport of voice and

data over fiber optics networks.

Product GuideProduct Guide

Company Management

David M. Rickey, President and CEO, spent 8 years with 0ortel where he led the wafer fab engineering and manufacturing. Prior to that Rickey held engineering positions at IBM.

Rickey graduated Summa Cum Laude from Marietta College with a BS in Mathematics and went on to earn an additional BS in Metallurgy and Materials Science from Columbia University. He also received an MS in Material Science and Engineering from Stanford University.

Rickey epitomizes the high level of experience and education attained by many other officers in the company. Management has a reputation for (1) aggressiveness, (2) dedication to quality and reliability, and (3) exceeding expectations. Below is an illustration of how AMCC continues to beat analysts’ estimates.

Sep 1999 Dec 1999 Mar 2000 Jun 2000 Sep 2000

Estimate 0.06 0.09 0.14 0.17 0.23

Actual 0.08 0.10 0.16 0.21 0.26

Difference 0.02 0.01 0.02 0.04 0.03

% Surprise 33.33 % 11.11 % 14.29% 23.53 % 13.04 %

Competitive Advantages

• Intense focus on the fiber optic market

• Successful in acquiring talented managers and engineers

• An unequaled portfolio of complete optical solutions

• Industry-leading innovations leading to extensive patents

• Time-to-market remaining a key trait

• Service capabilities allow for close relationships with customers

Fueling Future Growth

• The astonishing growth of optical networking

• An aggressive acquisition strategy

• A high commitment to R&D (Research and Development)

• Service capabilities allow for close relationships with customers

to better understand and respond to unique requirements

Industry Description

Major Competitors:

• PMC Sierra (does not specifically focus on fiber optics)

• Vitesse Semiconductor (lacks the execution of AMCC as

evident by the growth disparity--more than 2x the difference)

Buyer Relationship: AMCC holds the bargaining power due to the

insatiable demand for such advanced solutions, which few

companies can offer.companies can offer.

Supplier Relationship: The bargaining power shifts due to the

supply of wafers.

Barriers to Entry: Entry into this market remains remains difficult

due to (1) high research costs, (2) a shortage of talent, (3)

numerous patents held by incumbents, (4) today’s leaders are far

down the learning curve with the necessary resources to capitalize,

and (5) exceptionally long product cycles allow for companies like

AMCC to maintain a virtual lock on the market for years to come.

Q2 2000 Q1 2000 Q4 1999 Q3 1999 Q2 1999 Industry

Average

Sequential Rev.

Growth (Q-over-Q)

31% 30% 25% 21% 20% 11-13%

(roughly)

Gross Margin 74.8% 74.0% 73.0% 71.1% 70.1% 55.5%

Operating Margin 41.8% 40.4% 37.9 37.6% 33.9% 22.1%

Current Ratio 20.34 24.91 36.19 5.94 6.64 4.28

LT Debt-Equity

Ratio

0.00 0.00 0.01 0.04 0.05 0.11

Selected Ratios and Statistics

Ratio

Take notice of…

• Increasing revenue growth rate (almost 3x industry average)

• Increased profitability (operating margin almost 2x industry average)

• Exceptional liquidity (almost 5x industry average)

• Strong financial position

Other Fast Facts and Investing Information

• Applied Micro Circuits

• (0asdaq: AMCC)

• Price as of 10/16/2000: 180 13/16

• Market Capitalization: $22.7B

• Total Cash: $1.04B

• Sales (Trailing twelve mos.): $274.0M• Sales (Trailing twelve mos.): $274.0M

• Most recent quarter: $97M

• EBITDA (Trailing twelve mos.): $80.8M

• Current P/E Ratio: 167

• Employees: 655

• Customers: Alcatel, Cisco Systems, Hitachi, JDS Uniphase, Juniper 0etworks, Lucent technologies, 0okia, 0ortel 0etworks, Siemens, Sycamore 0etworks, Tellabs, Tellium, 3Com, and many more.

The chart above shows the stock performance of AMCC since its

initial public offering. 0otice the “Line of Support” and the two

circled tests of this support line. Technical analysis suggests limited

downside risk of the lower to mid-160’s. This does not factor out

execution risks.

Why Should You Buy AMCC?

• At the forefront of one of the greatest communication revolutions of all time--the fiber optic revolution

• One of the most profitable companies in the business world today

• 0o matter which networking companies ultimately win in optics, AMCC benefits because of their broad customer base

• Recently announced merger with MMC 0etworks will allow • Recently announced merger with MMC 0etworks will allow for the introduction of many upgrades and new advanced products for the next several years

• OC-192 products are beginning to ramp up (going from 5.3 million in revenue last quarter to 15.0 million this quarter)

• Book-to-bill numbers (1.5 for communications products / 3.0 for OC-192) suggests strong demand is far from slowing

• Recently announced 2-for-1 stock split shows the confidence management has in the future performance of its stock price

David Rickey

President and CEO

“I have never felt better about our prospects.”

- Q2 conference call (10/11/2000)