guidance of 7% – 11%. The new guidance implies revenues in the range of $438.9 million – $454.6 million, significantly lower than the previous guidance of $465.0 million – $485.9 million.

Reasons for Downgrade

Altera stated that the revenue outlook has deteriorated across all major vertical markets, including both large and small customers. Only North America is expected to benefit from rising military sales. All other geographies are expected to be weak. Most customers reduced demand due to economic uncertainty, macroeconomic concerns, and lower than planned sales.

This is the second instance where Altera lowered its revenue guidance in the past few quarters against its usual practice of upgrading guidance as the quarter progresses.

Like its prime rival Xilinx Inc. (NasdaqGS:XLNX - News), Altera is also clearly having a tough time due to the slowdown in the economy. In the September quarter, Altera also lowered its revenue guidance due to weaker demand in several vertical markets including Telecom and Wireless (particularly outside Asia). In addition, Industrial Automation, Military, and Test were also weak as customers moderated their purchases in light of macroeconomic uncertainty and other near-term changes to their business environment. 

Xilinx also followed suit in the September quarter. For the December quarter, Xilinx has already estimated a 3% to 8% sequential decline. We now expect a more severe decline for Xilinx as well given the tough economic conditions being faced by most semiconductor companies.

Other Key Players

Concurrent with Altera, industry leader Texas Instrument (NYSE:TXN - News) slashed its revenue guidance for the December quarter as demand was adversely impacted with most customers bringing down their high-level of inventories. Texas stated that the reductions are due to broadly lower demand across a wide range of product markets, customers, end products, the only exception being wireless applications processors. In particular, recessionary environment in Europe continues to impact the business followed by Asia and the US.

Industry Trends

Last month, chipmaker Microchip Technology Inc (NasdaqGS:MCHP - News) also cited demand being weak across end markets leading to a build-up in inventories across the supply chain. In fact, the company was one of the first semiconductor companies to lower expectations in the earnings cycle. The company believes the December quarter is likely to mark the bottom for both sales and earnings and growth will resume in the first quarter of 2012.

Although most companies expect economic conditions to improve by the March quarter-end, the scenario doesn’t appear bright to us at this point. The world economy seems to be in turmoil and recovery is expected to be gradual. With Europe in doldrums and Asia also getting impacted, order patterns will continue to be weak and bleak. We continue to be wary and stay clear of investing in this sector now.

Meanwhile, the downgrade in guidance led to a 6.12% decline in Altera’s stock price in after market-hours trading to close at $33.31. Shares of Texas Instrument witnessed a 6% decline.

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