Bad news out of the programmable logic sector reaffirmed fears that the worst may not be over for chip suppliers closely tied to communications.
The two largest PLD companies-which each attribute as much as 75% of revenue to sales into networking and telecom equipment-last week said demand has continued to evaporate, with overseas customers joining the retreat.
San Jose-based Altera Corp. said demand weakness now spreading to international waters is so imperiling its business that, for the first time in its history, it will write down inventory-a move it refused to make last quarter, believing the year's worth of excess parts it was carrying could eventually be sold.
Altera said the $115 million pretax write-down it will record in the second fiscal quarter of 2001 represents just 40% of its inventory load, much in the form of Flex 10K and Apex 20KE die. Altera's bad news came one day after rival Xilinx Inc. lowered its June-quarter forecast for a second time, blaming a significant drop in "turns" business-orders booked and shipped out within the same quarter. Xilinx, San Jose, said revenue would likely decline 32% below the March quarter's $407 million, when it wrote down $30 million worth of surplus Virtex FPGAs.
QuickLogic Corp., a smaller competitor to Altera and Xilinx, is also feeling the pain. Its second-quarter revenue will likely decline 25% to 30% from the $10.8 million posted in the first quarter of 2001, the company said last week. QuickLogic attributed the contraction in large measure to reduced customer demand, particularly in Europe.
Approximately $1.1 million in revenue from a distribution agreement with V3 Semiconductor Corp. will help prop up the company's sagging sales. Without V3's products, revenue would decline 35% to 40%, the Sunnyvale, Calif., PLD company said.
More cancellations expected
"The networking infrastructure market is likely currently the most difficult programmable logic end market," said Eric Ross, an analyst at Thomas Weisel Partners LLC in San Francisco. "It has the worst inventory glut, due in large part to a heavy reliance on contract manufacturers, and demand remains elusive."
Although push-outs and cancellations by North American customers appear to be stabilizing, the potential for more cancellations from international customers means further declines loom in the September quarter, Ross said. International customers represent 47% of Altera's and 33% of Xilinx's sales, he said.Though no one's yet willing to estimate the extent to which the market will erode in Asia, Europe, and Japan, electronics companies in these regions recently reported dwindling demand and inventory excesses.
While both Altera and Xilinx appear financially positioned to weather the storm relatively well, Altera may struggle more to recoup lost ground.Apart from the weak demand and inventory glut that's affecting most of the semiconductor industry, analysts pin Altera's woes on a development software release two years ago that rendered its high-end parts unusable, and allowed Xilinx to surge ahead in design wins. The bug has long since been fixed, but Altera has never recovered its market position.
Worse still, the company stocked up on parts in anticipation of production wins that market watchers believe went to Xilinx instead.
At a recent trade show, Xilinx chips outnumbered Altera's four to one on prototype boards for next-generation networking gear, Weisel's Ross said.
Xilinx now garners 50% of its revenue from sales of Virtex and Virtex-E FPGAs, while Altera's Apex families
account for just 15% of its revenue, according to Ross. "Xilinx is in a position where they're getting more of the high-end new designs, and Altera's getting a lot of the low-end business," he said.
Altera maintains, however, it's picking up momentum on the strength of newer Apex 20KC and Max 7000B devices.
"We're taking more of the business available in the industry, both from the competition and in the ASIC and ASSP segments," said John Daane, president and chief executive of Altera, in a conference call with analysts. "I absolutely believe we are taking market share because of the uptick in design wins."
Xilinx executives were not available for comment by press time.
Haunted by history
The dynamics facing the PLD rivals are not that disparate, and any differences tend to be short-lived, suggested A.A.LaFountain III, an analyst at Needham Research, New York.
"What is very apparent," he said, "is that [Altera's and Xilinx's] overwhelming orientation to communications and networking that drove them to grow so fast in 2000 has come back to bite them."
LaFountain said the whole communications sector is still sitting on "more inventory than you can push into a Great Lake."
To keep future inventory levels down to two or three months, Altera said it will retain only its newest products in finished-goods inventory, while holding high-volume product lines in die banks and building older product lines to order. Additionally, it's working with suppliers to suppress cycle times, and with customers and EMS providers to improve inventory and demand data, Daane said.
Xilinx said sluggish sales will compound a product-mix shift to higher-density parts that is expected to push gross-profit margins down to 52% from earlier expectations of 58% to 60%.