No Comfort for Comm Chips From Cisco

Communications chipmakers could glean little comfort from Cisco's earnings report yesterday. One of the industry's biggest customers reported that demand has actually waned slightly over the last year, and sales may well dip further in the current quarter. In an industry starved for growth, that forecast gave little room for optimism.

Moreover, Cisco(CSCO) wrung out its impressive profits by keeping the squeeze on suppliers -- including chipmakers.

Still, the company's results only reflect what's come to be business as usual for beleaguered communications IC suppliers. Analysts say it only confirms their take on the humdrum prospects for the sector, at least in the near term.

"As we published in our headline note, the song remains the same. There's been no real change from a macro perspective," says Jim Liang, an analyst at Pacific Growth Equities. "Cisco's call really just confirmed what we had been observing for a while. The December quarter was good in terms of a seasonal uptick, but there's really no visibility in terms of a sustained recovery in either enterprise IT spending or carrier capex beyond the seasonal strength that occurred in the December quarter."

In fact, Cisco's management thinks CEOs have gotten thriftier with their IT budgets and predicts carrier spending will be down this year, while visibility is now murkier than it was a quarter ago. "Our view remains the same -- that the semiconductor group will remain choppy until such evidence occurs," says Liang.

Cisco said yesterday that its gross margins rose a little over 100 basis points, to 70.4%. Since the company scored those gains partly by securing good deals on the components that go into its equipment, the news suggests chipmakers remain under pricing pressure.

Granted, they're not necessarily bearing all the pressure, notes Banc of America's Sandy Harrison. After all, many of the semiconductor outfits that supply Cisco outsource their own chipmaking. So if Cisco asks them for price concessions, they can turn to the foundries that manufacture their silicon -- all of which are currently struggling with slack business -- and demand a break on prices themselves.