Chip Companies Won't Outgrow Their Customers

Despite all the ugly news on the telecom front, investors still haven't factored in realistic expectations for the silicon used in communications. For now, that's created a glaring disconnect. But at some point, a grudging Wall Street will have to rein in its growth outlook for companies that make communications circuits.

In a research note issued Monday, Lehman's Dan Niles points out that analysts expect programmable logic device makers Xilinx (XLNX) and Altera (ALTR) to post sales growth of 18% to 21% in calendar year 2003. But that rosy outlook doesn't coincide with the prospects for the companies' biggest clients: communications outfits such as Cisco(CSCO), Lucent(LU), and Nortel(NT).

The networking companies are expected to show flat revenue growth next year.

"Future growth forecasts for the PLD vendors seem out of alignment with some of their biggest customers," Niles said. The disparity is worth noting because networking is the biggest end market for both Xilinx and Altera, accounting for 31% and 25% of revenue, respectively, in the most recent quarter.

Throw in business from (likewise-besieged) wireless and wireline customers, and Xilinx draws a whopping 61% of revenue from communications, while Altera gets 49%.

That's a particularly painful revenue skew, given that business at big communications names is still deteriorating. On Monday, Intel CEO Craig Barrett said he expected the communication sector's troubles to continue through the end of 2003 or the beginning of 2004, according to reports. In other words, the fortunes of major communications-chip buyers don't look likely to pick up anytime soon.

Both Xilinx and Altera have outlined lousy to mediocre sales expectations for the just-ended quarter, with Xilinx guiding for revenue to fall 3% to 7% sequentially and Altera expecting revenue to be flat to up 2%.