Strong end-of-year sales of chips used in cell phones and networking gear pushed inventory levels down to the lowest point in years among electronics companies. The slim stockpiles have triggered a wave of new orders among chipmakers, as electronics distributors and other customers take steps to rebuild their inventories, according to a report by industry research firm iSuppli. The note follows stronger-than-seasonal sales reports by some chipmakers earlier this month, which led to
speculation that the supply of chips in the distribution channel may be piling up . But iSuppli's report suggests that the large chip orders may not be a cause for concern after all. "Exceptionally strong seasonal sales in the final quarter of 2005 left the semiconductor supply chain underweight," said iSuppli analyst Rosemary Farrell in a statement accompanying the report. According to iSuppli, semiconductor stockpiles in the electronics supply chain during the fourth quarter of 2005 were $726 million short of the optimal level. The firm had initially projected that inventory levels during the period would be off by $300 million. The bulk of the inventory reductions in the fourth quarter were in the wireless, networking and retail segments, according to iSuppli. iSuppli estimated that the chip inventory level in the current quarter remains well short of oversupplied, standing at negative $400 million. And with chipmakers continuing to suffer from a lack of back-end assembly and testing equipment, customer concerns of adequate semiconductor supplies persist. Some investors have worried that chip customers are ordering more supply than they really need. Earlier this month, Texas Instruments ( TXN) and National Semiconductor ( NSM) each reported better-than-expected sales during the typically slow first months of the year. National Semi noted that its distributor inventory during the quarter ended Feb. 26 surpassed the 10-week level; it was just below the 10-week level in the previous quarter.
The fear is that this behavior could eventually result in an inventory glut among customers, forcing them to put the brakes on subsequent chip orders. That scenario unfolded in 2004, resulting in missed financial targets, manufacturing slowdowns and some layoffs. With chip stockpiles significantly below their historical levels, however, iSuppli concluded that the rising chip orders were not a cause for concern. "Overall levels remain significantly less than minimal levels in the first quarter," the report read. Standard & Poor's semiconductor analyst Tom Smith said the inventory data could mean a quiet profit-warning season leading up to the quarterly financial results due by chipmakers in mid-April. Any announcements resulting from unexpected shortfalls in earnings or revenue will typically appear this week or next week, Smith said. Intel ( INTC), the world's No. 1 chipmaker, told investors earlier this month that its sales in the current quarter would be significantly below expectations. Most other chipmakers however, particularly those whose products are used in consumer electronic devices, appear to be experiencing solid business. The news about low channel inventory levels should also ease concerns that the chipmakers will face a sales slowdown in the second quarter, according to Smith. That could translate into bullish guidance when chipmakers deliver their financial results next month. "If you still have segments of the Street that are expecting lower guidance into Q2, well that doesn't seem so likely to me -- especially after this report," said Smith.