FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Sierra Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SERA)") else Response.Write("(NASDAQ: SERA)") end if %>
2075 North Capitol Avenue
San Jose, CA 95132
(408) 263-9300

UNION CITY, Ca., October 23, 1996/FOOLWIRE/ --- Sierra Semiconductor released their third quarter 1996 results late last week. Sierra's results reflected the impact of two strategic decisions announced during the quarter. First, the decision to exit the modem business and second, their purchase of the Ethernet switching assets of Bit Inc.

As they said in August, it is their intention to focus their energies and resources on their networking business where they believe Sierra holds a leadership position and where they believe the market offers a significant opportunity for future growth. Subsequent purchase of the Ethernet assets of Bit Inc. reflect the next step in the execution of this strategy. It is Sierra's intention to continue to broaden their product offering -- witness their recent announcement in the gigabit arena. Their goal is to be a dominant player in the networking semiconductor market.

Revenues for the quarter were $34.7 million. This revenue number compares to net revenues of $50.7 million in the third quarter of last year, a 32% decline year over year. Net revenues in the second quarter this year were $53 million, a 35% decrease sequentially. The revenue amounts for the quarterly comparisons are quite misleading and not necessarily informative without knowing and understanding the details that make up these numbers. So, it is best to look at the quarterly revenues in three separate components -- networking, user interface and other products, and the user interfaces that relate to the modem products. Networking is the revenue contribution from their PMC Sierra operations which will include in the future also the revenues from the Ethernet switching products and other networking types of products which may be acquired or developed. The user interface and other products category include the Apple products, custom products, and other telecom products they have been shipping to their customers. All of these product lines will continue to be sold to their customers based on their demand and, as previously announced, Sierra doesn't plan to design or contract for new chip design wins in these product areas, but they do plan to support their customers' needs and it is difficult to predict how long or how much product and revenue will be generated for these products. They plan to track and report these separately for the future so they know the impact of these product areas on their total business. And then the third category, user interfaces that relates to the modems. This represents the sale of their inventory that they anticipate over the next several quarters that this category will decline as their inventory sells through. They are no longer in full production with these products and they anticipate that almost all if not all of the units will be sold by the middle of next year. In the meantime they will report this revenue category separately also. For the third quarter, the networking category had $16 million in revenues, the user interface and other product category was $12.7 million, and the user interface related to modems was $6 million.

The net pre-tax loss for the quarter was $76.2 million. However, this includes several items which, again, require further explanation. First, the modem chipset business and the related charges, second the acquisition of the Ethernet switching technology, and third the profit relating to the other product lines. On a pro forma basis, excluding these special charges and the losses resulting from the modem related products in the quarter, then the operating profit would be approximately $4 million.

First, they announced in late August their strategic decision to exit the modem chipset business. Along with this, they reviewed the assets and inventory positions, their customer situation and the organization it takes to provide support for these product lines. They also considered the other product lines they are currently selling to their customers such as their custom products, their Apple products, and their other telecom products. They cam to the conclusion to transition these other product lines also since they are not the primary focus area of the company and they expect the revenue from those areas will be declining over the next couple of years. This all resulted in a one-time charge of $72.5 million to their third quarter operations. This is being reported as a special operating expense charge of $67.8 million in the restructuring cost line and a write-down of inventory in the cost of sales category of $4.7 million. This charge is an adjustment to the assets to reflect their estimated net realizable value, it's an accrual for personnel related costs to sell and support their existing inventory and customers, and the cost to restructure the relevant operations in Europe and North America. They anticipate that this charge will result in no future costs needed to be expensed as they sell through and exit the modem business. They plan to report no profits or margins on the modem inventory sales until they have a final accounting. At that time they will report the results of the actual disposition of the modem business as compared to the estimates established this quarter and accumulated in the $72.5 million charge.

The second special charge in the quarter relates to the September announcement of the purchase of the Ethernet switching technology and certain other assets of Bit Inc. Sierra issued 804,407 shares of Sierra common stock and this acquisition resulted in a one-time special charge of approximately $7,783,000 in the quarter for the write-off of the in-process technology that they acquired in that acquisition. In addition, their September balance sheetincludes approximately $325,000 of net assets acquired which will be amortized over the next several years. In summary, if you take the pre-tax loss for the quarter of $76.2 million and reduce it by the special one-time charges of $4.7 million (inventory writedown), the $67.8 million for the restructuring charges and the $7.8 million for the in-process R&D write-off, you arrive at a pro forma operating profit of approximately $4 million.

The consolidated operating gross margins recorded, excluding the special charge, was $18.1 million or 52% of revenue. However, this includes the results of the modem related revenue for the quarter. If you look at just the networking products gross margin, it was $11.7 million or 73% gross margin. And the user interface products was $6.4 million or 34% gross margin.

THEIR MODEL OF THE BUSINESS GOING FORWARD. The model for the networking products is the following. The networking products gross margins their model is 68-72%. For R&D it is 16-18% of revenue. SG&A is 18-20%. And operating profit margin is 30-34%.

The model for the other user interface products, excluding the modem products is as follows. The gross margin is about 50%. R&D is about 5%. SG&A would be right at about 18%. And that results in operating profit of about 27%.

Given the two different models, it is a little difficult to give a specific model for the consolidated results as it would very much depend on the mix and the percentage of the total business coming from networking products. However, since their focus and attention is on networking, they believe this area will be an increasing percentage of the revenue mix over the longer term. In the near term they should be reporting modem related revenue and no operating profits that would confuse the results compared to their model.

OTHER OPERATING AND BALANCE SHEET ITEMS. The tax provision is negligible in the quarter as they will be able to take a tax cut from the special charges in the quarter to offset the prior operating profits recorded. They are looking at the effect of these writedowns and charges and will have a better understanding of their annual and future tax rates as they do more analysis in the fourth quarter.

Cash has increased in the quarter to $27 million from the second quarter balance of $22 million. They continue to see that cash flow should be positive from ongoing operations aided from the exit of the modem business.

Their balance sheet has been adjusted to reflect realization of the modem accounts, especially in inventory, fixed assets, receivables, and prepaid.

Long-term debt has been reduced during the course of the year as they have reduced their requirements for foundry related payments and now, principally, it relates to the fixed asset leasing situations. They believe that their current cash position, their outlook for positive cash flow, and their ability to borrow from banking arrangements provides them adequate working capital for their operations in the foreseeable future.

The share count is down this quarter as the calculation excludes any dilution from options when you record a loss. The 29.8 million shares recorded is artificially low and a more normal share count would be in the 31-32 million ranges if the operations were reporting at a profitable number.

THE NETWORKING BUSINESS. PMC Sierra reported revenues of just over $16 million which was essentially the same as the prior quarter. In addition, PMC's book-to-bill ratio was in line with the rest of the industry but below 1.0, thus somewhat reducing their backlog. This was caused by 3 factors. One, the average lead time for semiconductor components of PMC's type have dropped to 4-6 weeks. Two, the inventory shipped in the first quarter of this year was being worked off by Sierra's customers. Three, there has been a slowing of the phenomenal growth rate for ATM LAN shipments in the last two quarters. Although in the last few weeks they have seen an increased level of quoting and polling requests which have them cautiously optimistic that next quarter may show a slight increase of revenue. But, due to the short lead times their visibility is limited. The flat revenues from Q2 to Q3 was the result of a decrease in ATM LAN IC shipments from the prior quarter combined with increasing unit shipments of T1/E1 products relating the frame relay switch fill plans, Sonnet SDH products, and ATM wide area network product shipments. Overall, LAN revenues were 30.6% of PMCs revenues, down from 46.3% compared to the second quarter. This reduction in ATM LAN revenues are coincident with PMC Sierra strengthening its grip on the ATM physical layer market. In other words, their market share remains intact and may be increasing as other suppliers become disenchanted with their chances of penetrating this technically demanding application segment and consequently reducing R&D investments in this area. Therefore, Sierra remains bullish regarding PMC's 1997 outlook.

NEW PRODUCTS. In the last quarter PMC Sierra announced a Sonnet tributary processor product known as the TUPP Plus, that enables transmission of fast packet LAN traffic over Sonnet lines. This device addresses specific requirements for the ISPs and regional Bell operating companies managing the aggregation of Internet traffic from access lease lines as well as the new requirements of Sonnet SDH transmission equipment. Already Sierra estimates that 7 major telecom equipment manufacturers have committed to using this device and several more have been sampled and are analyzing the devices. One such company is Newbridge Networks who is using it in their mainstream 3600+ bandwidth manager. It is the first device to support the international intermediate performance monitoring standards to insure reliable connections between nodes and a Sonnet ring.

PMC Sierra believes that ATM is winning the LAN battle for the enterprise switch and has already won the WAN battle. In fact a recent Dataquest study showed that ATM has gained market share in the LAN against FDI in 1996 and is expected to cross over important shipments in 1997. But the same study predicted that gigabit Ethernet would cross over ATM shipments in 1999. That is why Sierra is a part of the gigabit Ethernet alliance. They have set a target to eventually be the number one supplier of LAN backbone silicon technology. During the past quarter, PMC Sierra proposed an all CMOS gigabit Ethernet physical layer technology standard. There is interest in the industry but there is a long process of standardization in the IEEE committee that must be successfully completed before this technology can be exploited. The same technology can be used to drive other high speed protocols across copper cabling which, up until now, has traditionally been handled over fiber.

In addition to addressing gigabit Ethernet opportunities, PMC Sierra purchased the Ethernet switching intellectual properties of Bit, Inc. to address the exploding growth opportunity of Ethernet switching at the workgroup as well as the enterprise switches. This move accelerated their ability to participate in the Ethernet semiconductor market. PMC Sierra is presently sampling an 8-port 10-base-T switch chip while working on a 100-base TX and 155 ATM uplink and further incarnations leveraging a proprietary switching technology which dramatically reduces the cost per port of Ethernet switching equipment. The Ethernet switching equipment market is projected to grow at a compounded annual growth rate of 97% through 1999 to over $10 billion, up from just $343 million in 1994. Today, there are only a handful of semiconductor players in this market, none of which have secured an entrenched position. PMC Sierra will be investing aggressively in this area in the coming years to better address mainstream LAN market down to the workgroup level.

As PMC Sierra addresses the highest growth segments of the networking and telecommunications semiconductor markets, it enhances their ability to grow by expanding their serviceable available market, it diversifies their product portfolio beyond traditional ATM and telecom applications and it creates more opportunities for them to offer valuable solutions to their networking customers. These solutions enable customers to move forward in their quest to upgrade the information infrastructure to support the tidal wave of digital traffic driven by the Internet. As PMC Sierra has successfully penetrated every major market segment it has entered to the degree that they are at least one of the top suppliers in those respective segments, they believe they should grow at least as fast as their customers in 1997. And if they gain penetration, they have a chance to exceed those growth rates.

SHORT TERM OUTLOOK. They need to look at the separate pieces of the business as they have differeng financial characteristics and as they relate to the model of each of those product lines and the state of maturity of those products. They believe the modem products will be sold out during 1997 and revenues from their current inventory levels will probably be at their current run rates for the near term and declining toward the middle of next year. Aside from seasonality, the run rate on the custom products should remain as in the past. The networking product lines are the areas of primary attention.SHORT TERM OUTLOOK. They need to look at the separate pieces of the business as they have differeng financial characteristics and as they relate to the model of each of those product lines and the state of maturity of those products. They believe the modem products will be sold out during 1997 and revenues from their current inventory levels will probably be at their current run rates for the near term and declining toward the middle of next year. Aside from seasonality, the run rate on the custom products should remain as in the past. The networking product lines are the areas of primary attention.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.