IC inventory risks building, says analyst

SAN FRANCISCO—Total IC supply chain inventories grew 10 percent in the second quarter compared to the first quarter of the year, raising fears of downward pressure on semiconductor gross margins and future revenue declines, according to a preliminary second quarter inventory analysis by a Wall Street analyst.

The 10 percent sequential inventory increase among IC firms, distributors EMS vendors and handset, PC and communications equipment OEMs comes on the heels of 4 percent increases in both the first quarter of this year and the fourth quarter of 2009, according to Craig Berger, an analyst with FBR Capital Markets.

Berger said he was expecting an inventory increase of about 5 percent in the second quarter. He said the increase raises heightened red flags about future revenue and earnings misses by chip firms as downstream m customers stop replenishing inventory and even begin to de-stock inventory.

Chip firms' inventory dollars grew 12.5 percent in the second quarter, 10 points worse than typical, Berger said.  

"Clearly, chip firms are trying to build chip inventory to support customers’ increasing demand for product, though this magnitude of dollar inventory build suggests chip firms’ fabs are running hot, thus increasing some gross margin risks," Berger wrote in a report circulated Monday (Aug. 9).

Days of inventory at the firms surveyed are still at reasonable levels, Berger said, about 6.5 percent higher than the all-time lows hit in the third quarter of 2009.