Comms chips

Chip Gloom Shall Pass

As earnings season rolls on this week, some semiconductor companies are adding tepid fourth-quarter predictions to their disappointing third-quarter sales. But the industry consensus is that the slump is temporary, and that there isn't a collapse waiting in 2005.

Almost across the board, chip companies have warned they'll have disappointing sales for the quarter that ended in September. Sometimes the cause is a sudden loss of a big order, but the bigger problem is inventories, the unused stockpiles of chips already shipped to distributors and equipment vendors. It seems inventories have amassed to the point where buyers are slowing down, resulting in slower sales for chip firms.

The results will spread into the fourth quarter, as some companies are already predicting weak sales through December. But the sag in revenues should last "just a quarter or two" more, says Jeremy Bunting, analyst with Thomas Weisel Partners.

In fact, it's common for the chip industry to hit inventory problems after coming out of a slump, because customers get overly optimistic about their needs. They order more chips than they end up needing, and the supply chain takes time to digest what's been shipped.

Chip companies are compensating by slowing down production, realizing that the recovery isn't as strong as hoped. "We're at the beginning of a fairly conservative telecom spending cycle and a fairly conservative IT spending cycle," Bunting says.

An expected rush of year-end spending won't necessarily help, either. "The seasonal budget flush will not be able to overcome the inventory overhang within the wireline communications food chain," wrote analyst Chris Dzurinko of American Technology Research in a report issued yesterday.

Some companies such as Broadcom Corp. (Nasdaq: BRCM) are seeing signs of improvement already. "We are seeing strong increase in October bookings already, most of this for Q1," chief financial officer William Ruehle told investors on a conference call this afternoon.

PMC-Sierra Inc. (Nasdaq: PMCS) is likewise optimistic. "We're seeing spot shortages and spot expedites -- which is where people go when they can't get their hands on product," says chief executive Bob Bailey. That could be an indication that inventories are beginning to burn off. "So, I think this is the worst it'll go. I don't know if the end is in one quarter or two quarters, but the end is in sight."

For now, though, the sag in revenues continues. PMC yesterday told analysts revenues would fall between $60 million and $63 million, down from the $71.2 million it reported for the third quarter and well off the $85.7 million reported in the second quarter (see PMC-Sierra Q3 Revenues Dip).

For its third quarter, PMC reported net income of $6.3 million, or 3 cents a share. That compares with profits of $15.4 million, 8 cents a share, for the previous quarter.

During its earnings call Tuesday, Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC) predicted its revenues in December would be about the same as this past quarter's $61.1 million, which was down from $67.4 million the previous quarter. AMCC also reported losses of $18.3 million, or 6 cents a share, for its second quarter, which ended in September; losses for the first quarter were $21.8 million, or 7 cents a share.

For its second quarter a year ago, AMCC reported losses of $22.9 million, 8 cents per share, on revenues of $25.1 million.

— Craig Matsumoto, Senior Editor, Light Reading

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