Fresh off a round of warnings and downgrades, communication chip makers are adjusting to more bad news from one of their major customers,

Nortel Networks



Nortel on Tuesday evening

warned again that this quarter's revenue will fall short and said it expects to report an operating loss. The culprits: the global economic downturn, reduced capital spending and pricing pressure.

As if the cancelled and delayed orders weren't creating enough problems for the companies that make the chips that Nortel uses in its networking products. Already this week, four communication chip companies warned that revenues would fall short of expectations, sparking analysts' downgrades and casting a shadow over the near-term

outlook for the stocks. Now the chipmakers can look forward to pricing pressure at Nortel, and from Nortel. Typically, customers hit by pricing pressure try to get their suppliers to share their pain.

Nortel's ties are tightest with

Applied Micro Circuits


, which in the December quarter said Nortel accounted for 18% of its sales, according to a filing with the

Securities and Exchange Commission

. Then there's

JDS Uniphase


, which attributes about 15% of its business to Nortel.


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, two big programmable logic device makers, each garner about 7% of their sales from Nortel orders, according to

Lehman Brothers

. (

looked at

these ties in February after another Nortel warning.)

The problem is that telecommunication providers spending has slowed, which has led to fewer orders for networkers like Nortel. The networkers in turn have cut back on their demands from sellers like Applied Micro. And the entire semiconductor sector has been in a downturn since the fall, when demand for personal computers began decreasing.

But unlike the microprocessor makers that are starting to cite improving inventories and demand, communications chip companies are far from bottoming. For instance, as recently as mid-January, some communication chip companies were calling for double-digit growth in 2001. Now company executives and analysts are expecting the second quarter to be worse than the first quarter.

Lehman analyst Dan Niles said Wednesday in a note that he believes both Xilinx and Altera have seen bookings worsen during March as cancellations and delays actually increased, contrary to what the companies had anticipated. Niles now sees both missing revenue guidance by roughly 5% for the quarter. Xilinx had indicated a 15% decrease from the previous quarter and Altera a 20% decrease. For the June quarter, he predicts a 10% sequential quarter decline for both -- not the 5% he had anticipated.

And then there's the question of their stocks. Like all other communication stocks, Altera and Xilinx are likely to fall lower in the near-term. "We do not believe the current rally in semiconductor stocks is sustainable and that the index will reach new lows by the summer," Niles wrote in the note. (Lehman hasn't done underwriting for either company.)

Investors should probably be keeping this in mind as semiconductor stocks continue to defy fundamentals with their buoyancy. The

Philadelphia Stock Exchange Semiconductor Index

has been trading in a 100-point range for the past month. But the Nortel news did seem to be hitting the communication stocks Wednesday.

Applied Micro recently was off 10%, JDS Uniphase had given up 13%, Xilinx was down 5% and Altera had fallen 6%.

So maybe, just maybe, investors are starting to listen.

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Corrections and Clarifications.