Updated from 12:23 p.m. EST

A pair of chip companies are arguing that January and February haven't been that bad.

Both Fairchild Semiconductor ( FCS) and Xilinx ( XLNX) issued new, higher guidance this week for the March quarter. The duo report better-than-expected strength in the PC, third-generation (3G) wireless, and enterprise storage and networking markets, although those conclusions stand in conflict with projections from the biggest of the big.

However, the news comes in the same week that John Chambers, CEO of Xilinx-customer Cisco ( CSCO), warned that businesss has been slowing in the past two weeks. And, it comes only a month after the chip and computing industries reminded the Street that the first quarter would be seasonally slow, despite the lowered levels of business going into calendar 2002. Investors were slightly confused: Xilinx rose 1% in Friday trading, while investors continued downward pressure on Fairchild's shares, as it fell 2%.

Xilinx was too excited to wait until its March 5 midquarter update to raise its revenue expectations for the fourth quarter of fiscal 2002 from low single-digit growth to a 10% increase from the third quarter's $228 million to $250 million. Wall Street estimates call for a $237 million fourth quarter, according to Multex.com.

The programmable logic maker now plans to hit 56% gross margins, the high end of the range of guidance issued during its Jan. 17 earnings report, and sees days of inventory declining by 23% sequentially. Xilinx highlighted its storage and networking products for enterprise customers and its 3G business as areas of strength.

Both J.P. Morgan and Dresdner Kleinwort Wasserstein upgraded Xilinx Friday morning on the news, with J.P. Morgan also upgrading Xilinx competitor Altera ( ALTR). David Wu of Wedbush Morgan was excited by Xilinx's announcement because he thinks it confirmed what some on Wall Street saw in December quarter results, that a year-long period of inventory clearing was over for chipmakers such as Xilinx, Altera and Lattice Semiconductor ( LSCC).

"The first picture you take is not always crisp, but another six to eight weeks have passed," Wu said. "It's pretty clear that was the bottom. A company that says it will be up 10% based on half a quarter's worth of data, usually means they really think they can do much better than 10%, maybe 12% or 13%." Wu isn't concerned that Chambers' comments seem contradictory. If Cisco has flat revenues this quarter, as Chambers suggested, it would still buy components from Xilinx to stock its inventories. Wedbush Morgan analyst David Wu told clients that because Xilinx reported strength in older products, its outlook could signal "positive cyclical improvement," and he also pinpointed Altera as well as as other potential beneficiaries of stronger business.His firm has no banking relationship with the chip companies.

Merrill Lynch's Chris Danely told clients in a note that Xilinx's optimism most likely comes from better placement than its competitors at big customers such as Cisco, Lucent ( LU) and Ericsson ( ERICY) Merrill has no banking relationship with Xilinx. With Cisco's recent comments, however, it seems possible that Xilinx's uptick could be more about restocking customers' inventory, not necessarily end-market pickup.

Fairchild detailed increased activity in the PC and other consumer sectors as the reason for upping its projections. The high-performance component maker previously anticipated its revenue would fall 3% to 5% from the fourth quarter of 2001's $324.6 million in revenue. Customer orders remained healthy in early January, instead of napping until mid-February, leading the company to forecast flat revenue in the first quarter of 2002.

The chipmaker says its book-to-bill ratio is over 1:1 because of the unexpected orders. Not wanting investors to get ahead of themselves, Fairchild cautioned that from what it sees, the wireless market is seeing its normal seasonal downturn, and wireline, networking and power-supply businesses are still recovering at a slower pace.

Putting the news in context, just a month ago, chip manufacturers and compute -makers such as Intel ( INTC) and Compaq ( CPQ) tempered positive December quarter results with warnings that the postholiday period would be tougher because of a typical seasonal lull. Intel forecast a sequential 5% revenue slide, while Compaq expects an 11% drop, bracing the Street for weakening consumer strength in January.

More recently, quarterly stragglers Hewett-Packard ( HWP) and Dell ( DELL) reported results through the end of January that showed continuing health in the sector, though H-P forecast slightly down revenue and Dell sees sales falling 3% to 5% in the quarter under way.

Meanwhile, wireless chip stalwart Texas Instruments ( TXN) reiterated its previous March-quarter guidance Wednesday, forecasting flat revenues from the fourth quarter's $1.8 billion finish. Companies big and small have warned the market that IT spending did not return to health at the end of 2001, and could not be counted on to do so at the beginning of 2002.

At the very least, there are now two companies seeing a little life in their segments, but it's too soon to tell if, following a holiday season that wasn't supposed to be, some of the projected downturn might be lighter than expected as well.

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