We recently downgraded our recommendation on Applied Micro (AMCC) to Underperform from Neutral.

Earnings estimates have declined after the company slashed its guidance for the fourth quarter of fiscal 2012. The company now expects that the revenue in the fourth quarter will come in at 6% lower than the mid-point guidance of $52 million provided earlier.

The new guidance was down $3.1 million, driven by softness in both the Transport and Processor product families. The revenue shortfall was primarily attributed to softness in the service provider space and overall weakness in wire-line market. Nevertheless, OTN revenue and sequential growth came through as the company expected and did not account for any of the shortfall in revenues.

Applied Micro continues to expect earnings per share between ($0.10) and ($0.12) per share.

Consequently, two out of three analysts covering the stock have lowered their estimates for fiscal 2012.

The company has been reporting losses since last year and we do not expect the company to return to profitability before fiscal 2014.

Earlier, the company reported disappointing results for the third quarter. Although earnings of ($0.10) were in line with the Zacks Consensus Estimate, sales continue to be weak. Net sales came in at $56.3 million, down 9.6% year-over-year and 13.2% sequentially, failing to meet the Zacks Consensus Estimate of $59 million. Demand softness in the quarter was due to the clouded macro environment.

Judging by the weakened macro conditions and weak outlook of Applied Micro, we downgrade our recommendation to Underperform from Neutral.

Our recommendation is supported by Zacks #4 Rank, which translates into a short-term rating of Strong Sell.

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