Buried under an avalanche of excess inventory brought on by a sudden, massive shift in the communications landscape late last year, programmable logic suppliers last week got a glimpse of sunlight.
A slight increase in bookings for both new and surplus parts indicates OEMs have worked down programmable logic and FPGA inventories and are replenishing reserves, according to Christopher Danely, an analyst at Merrill Lynch & Co. Inc. in San Francisco.
While the two leading PLD suppliers still expect third-quarter revenue to decline sequentially, Danely said bookings by top North American customers appear to be on a slow upswing.
Lucent Technologies Inc. -- the first to stumble last year -- is leading the comeback on the strength of a big cellular basestation contract with China Unicom, while Cisco Systems Inc. and Nortel Networks Corp. are a quarter or two behind, he said.
"We're seeing the first signs of life in North America in over a year," Danely said. "It's still early, it's still small, but it's definitely an inflection point."
Inventory replenishment is likely to drive revenue up for a couple of quarters, though it could stall again next year while OEMs wait for end demand to return, he said.
Programmable logic is typically the first segment to recover from a downturn because lead times are much shorter than application-specific standard communications ICs, according to Danely.
Altera Corp. last week repeated an earlier forecast that revenue for its fiscal third quarter will be down 15% to 20% from the $215 million reported last quarter, with gross margins in the range of 63% to 64%. Executives at the San Jose company declined to further illuminate the demand picture.
San Jose-based Xilinx Inc. also declined to discuss its fiscal outlook prior to a scheduled update on Sept. 10.
Altera and Xilinx are still under mountains of excess parts in their own facilities -- as much as 11 and seven months' worth, respectively, according to company reports. By comparison, that's seven to 10 times higher than component inventories in the PC channel, said analyst Eric Ross at Thomas Weisel Partners LLC, San Francisco.
Big inventory write-downs in recent quarters served to reduce some of the burden, though both companies contend that what remains in stock can eventually be sold.
After announcing its first-ever inventory write-down in July, Altera detailed a tiered inventory model designed to reduce the risk of obsolescence of finished parts. Whether the new structure has helped alleviate the existing load was not apparent last week.
"By its nature, the new inventory model is a direction and evolutionary change in terms of the way in which we want to operate with customers," said Scott Wylie, vice president of investor relations at Altera. "The time to thoroughly implement will be measured in quarters, not weeks."
No true turnaround can be called, however, until the surplus is eliminated, according to Thomas Weisel's Ross.
"Yes, ordering has resumed, particularly for newer devices, but order levels are extremely low," he said. "In the older stuff, we haven't seen any movement."
That's because the OEM and EMS channel is still staring at a $500 million glut of communications components, the equivalent of about 10% of total programmable logic sales in 2000.
Some of that excess is becoming obsolete, sparking an uptick in purchases of new devices. "You can call it the bottom, but it's more like an extended U than a V," Ross said.