Analyst says the telecom inventory correction is over!
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06:48am EDT 16-Oct-98 BancBoston Robertson Stephens (Moosa, Elias 415-693-3418)
Order Patterns Confirm Our Belief That the Inventory Correction Plaguing ...
October 16, 1998
WE SEE INVENTORY CORRECTION AT AN END
Order Patterns Confirm Our Belief That the Inventory Correction
Plaguing Communications Device Companies May Have Ended
Elias Moosa (415) 693-3418 elias_moosa@rsco.com
Mark Edelen (415) 248-4688 mark_edelen@rsco.com
Summary:
** In our view, the over-inventory dynamic that has constrained demand for
communications devices for the predominant part of the past six months has
indeed reversed in September. In our view, this is a positive for several
companies in our universe including AMCC, Galileo Technology, Level One,
PMC-Sierra and Vitesse.
** The corrective cycle began in April as our index of inventory days reached
76 days after the March quarter. The June quarter saw a sharp decline in our
index to 66 days. We consider the range between 55 days and 60 days a
steady-state level. We have been anticipating a decline into this range
coming out of the September quarter.
** Early data points build a strong case for an end to the inventory correction
and a resumption of a secular growth in device demand. An off-cycle report
by 3Com in late September delivered a stunning drop in its inventories with
a 22% sequential decline in overall inventories and a drop to 58 days from
75 days in the previous quarter. We anticipate that other OEMs, as they
report their results, can confirm the trend at the system level.
** From a chip-level perspective, during its report, Motorola indicated that
its chip sales into the networking market had powered a 5% sequential
increase in its overall chip bookings after a long string of declines.
Later, Linear Technology, a broad-based analog supplier, also pointed to the
communications sector as an island of strength in a tough environement. In
the past days, AMCC, Vitesse and PMC have all reported positive inflection
points in bookings late in the September quarter.
** While we are pleased to call an end to this damaging cycle, we are quick to
note that the end of the inventory cycle marks relief from a technical
factor that has been constraining demand. A GDP related slowdown in spending
for telco equipment could deliver a fundamental drag on demand, but we
believe that evidence of such a slowdown is currently quite thin.
** Please reference our note from August 3, 1998 for a detailed discussion of
our view on the dynamics behind the inventory correction.
Figure 2: Communications OEM Inventory Trends Analysis:
Q1:C96 Q2:C96 Q3:C96 Q4:C96 Q1:C97 Q2:C97 Q3:C97 [
Inventory 89 81 66 55 55 63 55 68 76 66
Days (DOI) Q-Q
Growth:
Revenue 12% 19% 6% 10% 2% 2% 8% -4% 2% 10%
Inventory 29% 4% -10% -7% 5% 20% -6% 18% 16% -4%
Inventory 14% -9% -19% -17% 0% 15% -12% 24% 11% -13%
Days (DOI)
Source: Bay, Cisco, Cabletron, 3Com, Ascend, PairGain, Cabletron, Fore Reports
and BRS estimates.
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