Analysts split on Altera inventory build fears

SAN FRANCISCO—Several Wall Street analysts expressed concerns about inventory buildup by programmable logic vendor Altera Corp. following the company's strong first quarter financial report Tuesday (April 20). But others, including Paul McWilliams, editor of the technology investment newsletter Next Inning Technology Research, maintain that these concerns are off base.

Altera reported Tuesday a net income of $153.2 million on record first quarter sales of $402.3 million, beating consensus analyst expectations and the company's own revised guidance for the period. Sales increased by 10 percent sequentially and 52 percent year-over-year. The company said it expects further revenue growth for the second quarter to between $434.5 million and $460.6 million.

Mark Lipacis, an analyst at Morgan Stanley & Co. Inc., said in a note circulated after Altera's report that reports from electronics manufacturing service providers and OEMs point to a healthy measure of inventory build in the supply chain, responsible for Altera's strong first quarter results and second quarter forecast.

Altera's first quarter revenue and second quarter forecast appear 10 to 20 percent higher than two of its customers, Juniper Networks Inc. and IBM Corp., as well as higher than two EMS players that reported earnings so far, Jabil Circuit Inc. and Plexus Corp., according to Lipacis.

"We think this supports our view that upside has been driven at least in part by an inventory restock," Lipacis wrote.

"We expect Altera to continue to benefit from broad-based demand in the interim, but are concerned about an inventory build at Altera's customers, especially in the communications supply chain," Lipacis wrote.

Sumit Dhanda, a research analyst with Bank of America Merrill Lynch, also expressed concerns about inventories at Altera and other chip vendors in a research note following Altera's report. Dhanda wrote that Altera's mature product sales were sequentially flat in the first quarter after rising by 21 percent in the fourth quarter of 2009, an indication he said that buying has not returned to a reasonable level following panic buying in the fourth quarter.

Dhanda also pointed to a 42 percent spike in Altera's deferred income in the fourth quarter as evidence that products are not flying off the shelves of distributors. He said Altera's internal inventories increased by 25 percent sequentially to $87.3 million, the highest inventory level for the company since the third quarter of 2006. Altera's months of supply on hand increased from 1.8 months to 2.3 months, while distributor inventory increased from 0.7 months to 0.9 months of supply on hand, Dhanda wrote.

JPMorgan Chase & Co. analyst Christopher Danely said in a research note of his own that Altera's forecast calls for revenue from the communications end market to be 45 percent above the 2008 peak, though forecasts call for revenue at top communications OEMs to improve by only 6 percent above the previous peak. Revenue from the communications end market accounted for roughly 40 percent of Altera's first quarter sales.

Altera's second quarter forecast also calls for revenue from the industrial and auto end markets—about 24 percent of Altera's first quarter revenue—to be 30 percent above the previous peak, according to Danely.

"We are now officially worried about an inventory build for Altera," Danely wrote.