Broadcom Out in Front Again ... With Earnings Warning

Broadcom (BRCM Quote) is leading the communications chip sector once again, but this time its executives aren't smiling.

The company's first-mover status now comes in the realm of earnings warnings. Broadcom said Wednesday evening that revenue would fall 32% to 35% in the second quarter, worse than the 20% to 25% decline that it had previously told investors to expect due to a technology slowdown.

Broadcom's bad news could foreshadow troubles for other companies in the sector, including Applied Micro Circuits (AMCC Quote), Vitesse Semiconductors (VTSS Quote) and PMC-Sierra (PMCS Quote). The communications industry, from telecommunications to networking to cable, has been under severe pressure since late last year due to a capital spending contraction and lighter consumer demand.

But you wouldn't know this was bad news from the reaction of investors, who interpreted the news as being yet another sign that the cyclical semiconductor industry is nearing the bottom. In recent trading, Broadcom was up 7%, Vitesse rose 2%, Applied Micro gained 8% and PMC-Sierra was 8% higher.

Broadcom had actually been expected to fare better than its competitors because its products for the cable market are more closely tied to the consumer market than the extremely troubled telecom market the other companies supply. Applied Micro, Vitesse and PMC-Sierra sell their products to companies like Alcatel (ALA Quote), Cisco (CSCO Quote) and Lucent (LU Quote). Broadcom's largest customer, on the other hand, is Motorola (MOT Quote).

It's not that Broadcom's revenue warning wasn't expected. It was. Wall Street was on guard after one of the company's chip suppliers (Broadcom outsources most chip production) said last month that the quarter was weaker than expected and volume was down. But the decline is far worse than analysts expected. The guidance implies second-quarter revenue of $202 million to $211 million, while analysts were expecting revenue of $254.7 million. Analysts also were expecting a loss of 8 cents a share, according to Thomson Financial/First Call.

Now the communications chip companies that supply the hard-hit communications sector may be next. "I think there's a strong possibility that they are going to go through another season of warnings," said Jeremy Lopez, an analyst at Morningstar, which doesn't underwrite stocks.