FRANKFURT -- Cisco's inline Q, modestly improved inventory efficiency and only somewhat reserved outlook for the first quarter suggests that Celestica and Solectron are losing share at Cisco, according to Deutsche Bank analysts. DB believes U.S.-based EMS vendors will continue to lose share to more cost-competitive Asian-based suppliers like Hon Hai.

Cisco is one of the largest customers of the EMS industry and an indicator of the health of enterprise spending/communications equipment end demand. Cisco reported revenue of $6.58 billion, up 6% from last quarter and up 11% year on year, and roughly inline with consensus

($6.56B). Inventories increased 1% this quarter. Revenue guidance for 2006 was slightly below expectations.

Given the weak guidance by Solectron and Celestica, most EMS investors were expecting a meaningful inventory reduction (Solectron's revenue from Cisco declined 25% from the previous quarter). Solectron (14% of sales; switches and routers), Celestica (>10%; optical and switches) and Jabil (10-15%; routers, storage) have the most exposure to Cisco.

Switch sales increased 10% quarter on quarter, while year-on-year growth slowed to 3% for routers. Advanced Technology products remained strong, increasing 27% from last year.  Cisco's suggested that demand in Europe and the U.S. remains healthy.

DB remains cautious on the EMS industry due to their continued share loss to Asian-based competitors like Hon Hai. While Hon Hai's Q3 sales will likely be up roughly 50% year on year, the U.S.-based EMS industry's sales are forecast to be down 5%.

Solectron, Sanmina-SCI and Celestica are at most risk of further share loss, while Flextronics is best positioned for market share growth, said DB. 

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