Altera Slammed Over Revenue Warning

Updated from 10:35 a.m. ET

Semiconductor maker Altera(ALTR Quote) lowered forecasts for fourth-quarter revenue Wednesday, saying that sales had been hurt by steep inventories at the middlemen who sell to Altera's end customers.

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The company said it expects fourth-quarter revenue to come in flat from the previous quarter's $395.4 million, not the $445.8 million that analysts expected, according to First Call/Thomson Financial. Looking ahead to next year, Altera Chairman Rodney Smith said he expects first-quarter revenue to rise less than 5% from the fourth quarter. For 2001, he expects revenue will rise 35% from this year.

Altera's news Wednesday caused the stock to drop Thursday. It fell $2, or 7.7%, at $23.94. Altera also can be credited with dragging down shares of its main rival, Xilinx (XLNX Quote), and in combination with an earnings warning from Gateway (GTW Quote), other major technology players as well.

But given the stock's decline during recent weeks, it's clear investors already were concerned about decreasing demand for programmable logic devices, or PLDs, the type of chips Altera and Xilinx make. PLDs are chips that can be programmed by customers and are largely used in telecommunications. Earlier this week, Lehman Brothers drove down the stocks of both companies when analyst Dan Niles lowered his growth estimates, saying that demand from distributors and contract manufacturers was on the decline. (Lehman has neutral ratings on the stocks and hasn't done underwriting for either.)

That was essentially the problem that Altera's Smith tried to explain on Wednesday's conference call. End customers -- which in this case are large telecom companies like Cisco (CSCO Quote) -- buy PLDs from subcontractors. But first Altera typically sells to a distributor, and that distributor then sells to the so-called contract manufacturers, which make the parts that end-customers buy. About 70% of Altera's products go through such subcontractors in North America. It's those contractors that Altera says have built up too much product, making its November resales more sluggish than expected. In addition, Smith said that some customers getting into the DSL business bought too much. DSL is digital subscriber line, a type of broadband service.

But while the decline in Altera and other chip stocks industrywide may indicate that some investors believe a macro downturn is beginning, Smith argued that this is merely a specific inventory event. "Our view is that we are in a period of inventory correction and that the business will continue growing as soon as the inventories are burned off," Smith said. The company contended that inventory levels will return to normal in the second and third quarters of next year.