Optical/IP Networks

Inventory Bug Bites Components. Again

Inventory figures from Cisco Systems Inc.'s (Nasdaq: CSCO) earnings call yesterday made a bad day worse for a few chip firms.

After seeing inventories climb 20 percent during the third quarter, Cisco had expected -- and analysts had hoped -- inventories would decline during its fourth quarter, which ended July 31. Instead, inventories rose again, by 8 percent (see Cisco's Q4 Not All Smiles). That revelation, combined with a bad day for tech stocks in general, led PMC-Sierra Inc. (Nasdaq: PMCS) to drop 11 percent on the day, with related stocks falling as well.

Inventory buildups are worrisome because customers might decide to feed off excess inventory rather than ordering new parts.

"The sustained elevated inventory level at Cisco (and its EMS [contract manufacturer] partners) will likely continue to negatively impact the growth outlook for communications-IC vendors," wrote analyst Chris Dzurinko of American Technology Research in a note issued this morning.

Following Cisco's numbers, some chip and component stocks related to the comms sector took a beating today. Chip firms such as Broadcom Corp. (Nasdaq: BRCM) and PMC were hit hard, while optical components firms took a softer blow.

Table 1: Tough Day at the Office
8/11 Closing Change %change
Broadcom (BRCM) 29.21 -3.67 -11.2%
PMC-Sierra (PMCS) 9.79 -1.16 -10.6%
Vitesse (VTSS) 2.13 -0.25 -10.5%
AMCC (AMCC) 2.93 -0.21 -6.7%
Marvell (MRVL) 21.40 -1.74 -7.5%
Avanex (AVNX) 2.24 -0.17 -7.1%
JDS Uniphase (JDSU) 3.09 -0.11 -3.4%
Bookham (BKHM) 0.78 -0.01 -1.3%
Source: Reuters

Not everything can be blamed on Cisco. Broadcom, for instance, is suffering from the revelation that it would have lost money in the June quarter if employee stock options were expensed, says Deshyunt Desai, analyst with CE Unterberg Towbin.

Moreover, semiconductors in general have been under scrutiny. Intel Corp. (Nasdaq: INTC) kicked off this earnings season by saying its own inventories were higher than expected. And National Semiconductor Corp. (NYSE: NSM) didn't help yesterday when it cut its sales forecasts.

PMC did get stung by Cisco, but primarily on the enterprise side, Desai says. He thinks the PMC selloff was an overreaction. "I'm not concerned about the service provider side of Cisco's business," he says. "If you read through the Cisco commentary it's still healthy, with more stable growth than other areas."

Still, it appears investors at least made a connection between Cisco's fate and PMC's. "About 15 percent of [PMC's] revenue is derived from Cisco," Dzurinko says. "PMC tried to temper expectations during their call [on July 15], and obviously that wasn't all factored in." (See PMC-Sierra Reports Q2)

As for Cisco itself, shares fell $2.17 (10.6 percent) to $18.29 today.

— Craig Matsumoto, Senior Editor, Light Reading

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