Inventory Bugaboo Haunts Chips

Inventory problems continue to hang over the semiconductor industry, as the last 24 hours have seen four firms announce upcoming earnings weakness.

Altera Corp. (Nasdaq: ALTR), Cypress Semiconductor Corp. (NYSE: CY), Integrated Device Technology Inc. (IDT) (Nasdaq: IDTI), and, most notably Intel Corp. (Nasdaq: INTC) have all reduced their earnings guidance for analysts.

Intel, the most closely watched of the four, said yesterday that revenues for the third quarter are expected to land between $8.3 billion and $8.6 billion, compared with the company's old prediction of $8.6 billion to $9.2 billion (see Intel Cuts Q3 Outlook).

Intel schedules a midquarter update every quarter, and analysts had spent this week discussing the possibility that Intel would lower its earnings expectations, given the company's inventory problems last quarter. [Ed. note: It's not as if there was much else to talk about -- see Computer Error Sends Stocks Soaring). Still, Intel's stock took a beating this morning, dropping $1.63 (7.5 percent) to $20.00. By midday, 82 million shares had changed hands, compared with Intel's daily average of 62 million.

IDT's announcement was a little more surprising. The company said revenues would drop by 1 to 5 percent from the previous quarter's $101 million (see IDT Lowers Forecasts). The company previously said revenues could climb by as much as 6 percent.

Part of IDT's troubles came from the wireless sector. "The 3G business in Japan has hit a plateau or slowed down a bit," said CEO Greg Lang in a conference call with analysts yesterday, although he noted this setback appears to be temporary.

IDT also saw weak sales in network search engines, the chips that sit alongside network processors to do packet classification. Search engines make up 15 to 20 percent of IDT's revenues, writes analyst Sandy Harrison of Pacific Growth Equities Inc. in a note issued this morning. This business comes mostly from Cisco Systems Inc. (Nasdaq: CSCO), which is working through inventories before ordering more chips, IDT officals noted.

Analysts still think search engines are a strong business for IDT. "The [search-engine] business at Cisco, while soft this quarter, has strong long-term trends" because the devices are "designed into the most important Layer 3 boxes," writes analyst Allan Mishan of CIBC World Markets, in a research note today.

Cypress is neck-and-neck with IDT in search engines, with both companies vying for Cisco sales. Consequently, Harrison speculated in his note that Cypress "could potentially rein in expectations as early as today" -- and in fact, he was right. Cypress this morning announced its September revenues would drop 5 to 10 percent from last quarter's $264 million (see Cypress Lowers Earnings Forecast).

The next company to watch might be PMC-Sierra Inc. (Nasdaq: PMCS), particularly with Cisco being a culprit in IDT's shortfall. The damage here might not be so bad, though: Cisco represents 25 percent of IDT's revenues but only 10 percent of PMC-Sierra's.

Altera, by the way, said it expects sales of around $269 million for the September quarter, down from its previous estimate of $274 million to $280 million.

Here's how the stocks were faring at midday: IDT was down 48 cents (5 percent) at $9.57, Altera was down $1.08 (6 percent) at $17.98, and Cypress was down 61 cents (6 percent) at $9.10.

— Craig Matsumoto, Senior Editor, Light Reading

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