Communications chipmakers always enjoy a good

Cisco

(CSCO) - Get Report

earnings report.

The equipment giant lit up the market Tuesday afternoon with a 5.5% sequential gross margin advance to 63.1% and those quasi-optimistic John Chambers phrases investors love to hear. Chipmakers will rejoice in ever-lower Cisco inventory numbers, meaning that the shelf-stocking that began as a trickle in the December quarter will continue to build.

However, Chambers didn't claim witness to a wave of spending, signaling that end markets will continue to be a sticking point in the recovery trajectory of Cisco's suppliers.

Wednesday morning, investors were already translating the well-accepted Cisco report into gains for chipmakers.

Applied Microcircuits

(AMCC)

vaulted up 12% in early trading, while

Broadcom

(BRCM)

rebounded from a terrible Tuesday with an 8% gain,

PMC Sierra

(PMCS)

won a 15% gain,

Xilinx

(XLNX) - Get Report

advanced 7%, and both

LSI Logic

(LSI) - Get Report

and

Anadigics

(ANAD)

leapt 16%. No doubt, chip investors are not inclined to check under the fingernails of any good news flowing into the sector.

Inventory was the highlight of the call for chipmakers, with Cisco saying it has worked its way through the $2.2 billion in inventory the networking equipment maker originally wrote down in the third quarter of 2001. It whittled that stockpile down to $73 million in the April quarter, and that alone was an occasion to rejoice. Additionally, the company's existing inventory line sank 15% sequentially from $1 billion in the second quarter to $869 million in the third, a 15% improvement. To give perspective, Cisco carried $1.68 billion in inventory on its books in the third quarter a year ago; the third quarter of 2002 represents a 48% improvement.

Chambers spoke of the linear development of orders in the quarter, with business building to a crest in April. He hopes the same is possible in July, though Cisco offered a conservative forecast of flat-to-slightly-up revenue in the fourth quarter. Chambers talked of a second-half rebound in tech spending but acknowledged he'd seen no proof yet.

Lack of visibility into end markets keeps many on the Street mum on a communications chip rebound. "Communications IC companies will not see a return to sustainable sequential revenue growth until 2003," US Bancorp Piper Jaffray's Ashok Kumar advised clients.

Additionally, Robertson Stephen's Arun Veerappan believes that lower component costs may have added to Cisco's gross-margin windfall. With chip companies struggling to cobble together revenue, the analyst thinks that pricing pressure will eat into the gains brought by restocking inventories.