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Comms chips

Inventory Blues

1:20 PM -- The inventory flush is continuing at Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (NYSE: JNPR), with components companies getting stung by it.

EZchip Technologies Ltd. (Nasdaq: EZCH) announced this morning that Juniper, its largest customer, drastically cut down on orders in April and May. According to EZchip, Juniper said it was using up the inventory it had. (See EZchip Reports Q1.)

EZchip didn't quantify what that's going to mean, but Juniper represented more than half the company's $9.8 million in revenues for the first quarter, which ended March 31 -- so this has the potential to be bad. Cisco is expected to become the company's largest customer as the ASR 9000 router gets into volume shipments, but that won't happen in time to offset Juniper's stalling.

(EZchip still won't confirm the ASR 9000 win -- see Chipping Away at Cisco's ASR 9000 and EZchip: New Routers Remain on Track.)

On this morning's conference call with analysts, CEO Eli Fruchter said EZchip got a normal-sized order from Juniper for June, and that Juniper's third-quarter forecast should be normal, too. So, EZchip is treating this as a one-time glitch. (I have to point out, though, that many a company has been torpedoed by believing its customers' sunny forecasts. Not saying that's happening here, just saying it's possible.)

EZchip shares are down $2.51 (15%) at $14.10 in midday trading.

On Cisco's side, there's an optical story to tell. The company's earnings call yesterday included a mention of its channel partners flushing out inventory -- the result being fewer optical component purchases attributed to Cisco, analyst Paul Bonenfant of Morgan Keegan & Company Inc. wrote in a note this morning.

He'd noted this possibility several weeks ago. (See Coming Soon: An Optical Uptick?)

The companies hit hardest by this would be Finisar Corp. (Nasdaq: FNSR) and Opnext Inc. (Nasdaq: OPXT), but each has ways to deflect the blow. Bonenfant thinks Finisar might be getting more money out of Huawei Technologies Co. Ltd. , and that Opnext could make up revenues via a solid quarter out of the acquired StrataLight. (See Opnext Steps Up With StrataLight.)

The March quarter should be the worst of it, Bonenfant writes, followed by "a re-set near current levels versus a bounce-back" -- in other words, the kind of flattening-out that Cisco itself is reporting. (See Cisco Offers Light in the Gloom.)

— Craig Matsumoto, West Coast Editor, Light Reading

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