Chip Inventory Fears Ease

Vendors of programmable telecom chips continue to release information about the negative effects of inventory buildups, which are forcing them to slash upcoming earnings guidance. But this news has been leaking out for a while -- and it looks like the market is staying away from the panic button.

Late yesterday, Xilinx Inc. (Nasdaq: XLNX) announced that due to "softening bookings from several large North American customers," it was revising down its third-quarter sequential earnings guidance from 12 percent revenue growth to a range of 5 to 7 percent (see Xilinx Downgrades Guidance).

The news came just a week after Xilinx's chief competitor, Altera Corp. (Nasdaq: ALTR) announced an even more drastic prediction that earnings would show no growth at all for the upcoming quarter.

So far, though, both vendors seem to be staving off a market collapse: In fact, in early morning trading, Altera shares were up over 2 percent, trading at $28.14. And Xilinx's had slipped just a bit, trading at $41.50, less than one-half a percent off yesterday's closing price.

As previously reported by Light Reading, rumors about problems in the networking equipment components supply chain had been filtering into the market for some time (see Components Shortage Gets Real). In fact, Cisco Systems Inc. (Nasdaq: CSCO) had already said it was stockpiling inventories of certain components (see Cisco: Boom or Bust? ) to avoid shortages. Such news had already resulted in a broad selloff of the major networking chip players.

Sources told Light Reading that the reason for the mild market reception is based on the premise that a major correction for inventory backlogs is already built into the stock prices of Altera and Xilinx. Thus, it's even possible that buyers will see a slightly reduced share price as an opportunity to buy into a market that's slated to continue a steady upward curve, despite current setbacks.

Altera and Xilinx make programmable chips called field programmable gate arrays (FPGAs) that telecom equipment makers and other component manufacturers can adapt with software to fit their own needs. FPGAs are a cheaper and often much more practical alternative to custom-designed chips called application specific integrated circuits (ASICs). As a result, stocks in companies that make them have been considered a boon for investors (see Hip to Programmable Chips).

And, as the market leaders, Altera and Xilinx have shared the bounty. Both companies reported record earnings last quarter: Altera said its third-quarter sales of $295.4 million represented year-to-year growth of 84 percent. And Xilinx said its quarterly revenues of $437 million were up 83 percent year to year.

FPGAs also show no sign of dwindling in importance in the long term. At one time, Sycamore Networks Inc. (Nasdaq: SCMR) used Xilinx-powered boards in its switches. Hyperchip Inc. had said it would use Xilinx chips in developing its terabit router (see Hyperchip Raises $67 Million ). And other component vendors, such as PMC-Sierra Inc. (Nasdaq: PMCS), rely on FPGAs for some of their product offerings (see Xilinx Shipping Level 3 Cores).

"We see this as an expected inventory correction," said one market analyst, who asked not to be named. "I'd say it's a soft landing."

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com