Altera warning knocks Xilinx, other rivals

Altera on Tuesday said it expects first-quarter sales to drop 20 percent from the $368 million posted in the fourth quarter. A survey of analysts conducted by First Call was predicting revenue of $412.6 million and earnings of 22 cents per share.

Altera shares were down $1.13 at $22.25 in premarket trading on the Island ECN. Xilinx shares fell $1.44 at $37.31 in premarket trading. Much of the bad news has already been priced into shares, analysts said.

Altera and Xilinx make programmable logic devices and software used in communications, electronic data processing, industrial, and consumer markets.

Altera cited a slowdown in the communications industry for the shortfall.

"An industrywide inventory correction began in the fourth quarter, and now reduced end-market consumption is exacerbating the impact of that correction," CEO John Daane said in a news release. "We are seeing the effects of reduced capital spending by service providers; and other communications market end-customers impact our customers' business, and hence their purchases. The slowdown in end-market activity is prolonging the inventory correction, but we believe that moderate sequential revenue growth will resume in the second half."

But analysts said the problems could continue beyond that.

Bear Stearns analysts Charles Boucher said in a research note that correction in the networking and telecom markets "is likely to persist well into the second half of 2001."

"Excess demand for semiconductors in the communications markets during the last two years was due not only to the usual double ordering associated with tight supply conditions, but also to over-investment in the communications service and hardware markets, effectively creating another layer of excess demand. The rapid deterioration in backlogs and new orders is the unwinding of this excess," he wrote.

Analysts expect the problems troubling Altera to hit competitors Xilinx and Lattice, and they widely predicted that Xilinx would warn investors it would miss estimates next week. Xilinx is scheduled to report results for its fourth quarter next month, and it is expected to report a profit of 29 cents per share, according to First Call.

The troubles could also extend to other telecom suppliers, including makers of communications integrated circuits, flash memory, static RAM and analog components. Such companies could include LSI Logic, PMC Sierra, Conexant Analog Devices and Cypress Semiconductor.

National Semiconductor and Texas Instruments, which make analog devices, have already warned investors that they would miss expectations.

Lehman Brothers analyst Dan Niles pointed to increasing inventory levels at networking equipment manufacturers Cisco and Lucent in his downgrade of Altera and Xilinx, saying that it would likely prolong inventory issues through the channels beyond the June quarter.

And, he warned, those rising inventory issues also signal that end-demand for the industry is slowing down, "because despite the publicly stated inventory reduction plans, which began last quarter, sequential growth in inventory still outpaced sequential growth in sales."

"Given the deteriorating economic environment domestically, we believe it may take some time before component suppliers see demand improve," he wrote.

Niles cut his 2001 earnings estimate on Altera from 89 cents per share to 59 cents, and his 2001 estimate for Xilinx from $1.25 to $1.01.

Bear Stearns' Boucher cut Altera's 2001 earnings estimate from 95 cents per share to 59 cents per share, and its 2002 estimate from $1.20 per share to 80 cents.

Boucher dropped estimates for Xilinx for the March quarter from 29 cents per share to 23 cents; for fiscal 2001 from $1.19 to $1.13; and fiscal 2002 from $1.40 to $1.00. He also cut March quarter estimates for Lattice from 31 cents per share to 28 cents, and 2001 estimates from $1.36 to $1.12.

ABN Amro analyst David Wu dropped Altera estimates for 2001 from 97 cents per share to 60 cents, and lowered his 12-month price target from $35 to $27. Wu cut his Xilinx fourth-quarter estimate from 30 cents to 25 cents per share, and fiscal 2001 estimate from $1.20 to $1.15. The analyst dropped his 12-month price target on Xilinx from $55 to $45, although he maintained his "add" rating on the stock.

Credit Suisse First Boston analyst Tim Mahon cut his Altera earnings estimate for the first quarter to 16 cents per share, down from 22 cents, and he cut his 2001 estimate to 56 cents per share, down from 95 cents.