Communications chipmakers could glean little comfort from
Cisco's earnings report yesterday. One of the industry's biggest customers reported that demand has actually waned slightly over the last year, and sales may well dip further in the current quarter. In an industry starved for growth, that forecast gave little room for optimism.
wrung out its impressive profits by keeping the squeeze on suppliers -- including chipmakers.
Still, the company's results only reflect what's come to be business as usual for beleaguered communications IC suppliers. Analysts say it only confirms their take on the humdrum prospects for the sector, at least in the near term.
"As we published in our headline note, the song remains the same. There's been no real change from a macro perspective," says Jim Liang, an analyst at Pacific Growth Equities. "Cisco's call really just confirmed what we had been observing for a while. The December quarter was good in terms of a seasonal uptick, but there's really no visibility in terms of a sustained recovery in either enterprise IT spending or carrier capex beyond the seasonal strength that occurred in the December quarter."
In fact, Cisco's management thinks CEOs have gotten thriftier with their IT budgets and predicts carrier spending will be down this year, while visibility is now murkier than it was a quarter ago. "Our view remains the same -- that the semiconductor group will remain choppy until such evidence occurs," says Liang.
Cisco said yesterday that its gross margins rose a little over 100 basis points, to 70.4%. Since the company scored those gains partly by securing good deals on the components that go into its equipment, the news suggests chipmakers remain under pricing pressure.
Granted, they're not necessarily bearing all the pressure, notes Banc of America's Sandy Harrison. After all, many of the semiconductor outfits that supply Cisco outsource their own chipmaking. So if Cisco asks them for price concessions, they can turn to the foundries that manufacture their silicon -- all of which are currently struggling with slack business -- and demand a break on prices themselves.
Still, it's clear that communications IC suppliers continue to have little leverage on pricing. The ongoing slump suggests a more painful industry shake-out is likely in the offing, notes Liang. Already, layoffs have taken place at
Applied Micro Circuits
"Right now the economy is weak so demand is weak and there's continued excess supply, given that there are still many suppliers," says Liang. "But the semiconductor industry is very good in terms of rationalizing itself through downturns." Over the next 12 to 18 months, he predicts supply will be forced back into line through continued restructuring and layoffs -- as well as consolidation, as companies are forced to shut down or merge.
Despite the marked lack of good news to be drawn from Cisco's report -- Harrison sums it up as "pretty much a nonevent" for communications chip stocks -- a raft of Cisco's chip suppliers enjoyed a small pop today, taking part in a
broader market surge (that later subsided) following Secretary of State Powell's speech.
gained 37 cents or 1.9% to $19.31, while
climbed 11 cents, or 1% to $11.20. Applied Micro closed flat at $3.50, while PMC-Sierra was up 4 cents or 0.8% to $5.28; Vitesse gained 11 cents or 5.6% to $2.05. Broadcom was up 8 cents or 0.6% to $13.69, while shares of Agere were up a penny, or 0.6% at $1.58.