Results Mixed So Far Page 4 Earnings Outlook

Issue 303: Wednesday, Jan. 30, 2008

In This Issue

Page 1 Telecom Overview: Results Mixed So Far Page 4 Earnings Outlook

Page 6 Inventory Monitor: Not Bad, All Things Considered

Page 8 Earnings Schedule With Results

Page 9 The Telecom Connection Portfolio

Telecom Overview: Results Mixed So Far

In this week’s edition of The Telecom Connection there are plenty of earnings to talk about. Over the course of the past week Cypress (CY) disappointed me, eBay (EBAY) passed the torch, Microsoft (MSFT) wowed investors, Qualcomm (QCOM) was OK and Verizon (VZ) put people to sleep.

But all that’s history, and there are another six names from the model portfolio reporting over the course of the next seven days, including Alvarion (ALVR), Cisco (CSCO), Google (GOOG), NeuStar (NSR), Riverbed (RVBD) and SiRF Technology (SIRF). So I’ve provided a short summary of what I am expecting from each company.

We also have the first meaningful look at the status of inventory as we leave the December quarter behind. While it ticked up slightly, I still believe that we’ll exit this reporting period in very good shape.

I have also taken a different cut on the inventory equation this week. Rather than simply look at what percentage of my universe of companies has reported, I looked at what percentage of the inventory was represented historically for the universe and the various subgroups.

Last, I have updated the earnings reporting schedule where new information has been made available, as well as with this past week’s results.

Now let’s start with who reported what.

(Continued on the next page)

PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE

Issue 303: Wednesday, Jan. 30, 2008

The Earnings Stream Picks Up • Cypress Semiconductor’s results made me look like an idiot, but it’s a position that I’m used to. The results missed expectations in a quarter that I thought would be a lay-up. Management cited demand weakening late in the quarter, particularly among consumer customers, and that translated into weaker-than-expected guidance for the March quarter. This is not an indictment of PSoC (programmable system-on-chip); it’s just a bump in the road as some customers worry about end-user demand.

As I noted last week, PSoC is about a secular change taking place in the industry -- not just a single quarter. This will be very much like the field programmable gate arrays (FPGA) of the early 1990s, and that has not changed.

One issue I want to mention because it will impact the March quarter is a change in the company’s revenue recognition policy for its Asian distributors. In the past, Cypress recognized its revenue when it made the sale to the distributor. This will happen at the point at which the distributor sells to the end user. The change will put the Asia distributors on the same basis as the rest of the company’s revenue recognition policy. However, it will reduce March-quarter revenue by an estimated $18 million to $23 million to allow for revenue that has already been recognized.

Despite the “miss” and the weak guidance, the stock continues to trade with SunPower (SPWR) -- both of which have bounced off their recent lows. Cypress needs to separate itself from SunPower, but the fourth-quarter results and first-quarter outlook did little to accomplish that feat.

I have no plans to change the current model portfolio position in Cypress because of the long- term potential of PSoC. Consequently, anyone who isn’t holding shares of the stock may want to initiate a position at these levels.

• eBay investors (including me in the model portfolio) got what they wanted -- the announcement that John Donahoe will be assuming the CEO position effective April 1. The company’s fourth-quarter results were above Street consensus, but the guidance for the first quarter and 2008 was below current expectations. We can argue whether or not eBay is being conservative, but one thing is clear: Donahoe is going to make the kind of changes to the Marketplace Division that he revealed to the Financial Times of London last December.

With PayPal, Skype, StubHub, Classifieds, et al. providing strong growth, eBay has obviously done an excellent job of diversifying its operations for the future. But it is apparent that investors and the Street need to see a re-invigoration of the Marketplace Division. It’s not that results have been bad; it’s just that the Street expects more from the base business. And that’s what Donahue is planning to do. It will probably take a couple of quarters to see some better performance, but the valuation differential between eBay and Amazon (AMZN) is so high that it should be worth the wait.

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

• Microsoft reported a quarter that was difficult to find fault with, so I won’t dwell on the details here. The critical points from my perspective were quite simple: PC demand is strong, product uptake remains solid, and, fortunately, guidance for the March quarter remains quite positive. Given that Microsoft’s guidance is generally on the conservative side, the results should wind up exceeding the current Street consensus, as I’ve been hoping.

• There wasn’t much to be surprised about with Qualcomm’s results, given the increase in guidance late in the quarter. The outlook was largely assuming a seasonal March quarter with units down sequentially in the 10%-15% range for the industry. Management acknowledged its attempts to move its Nokia (NOK) issues to the Delaware Chancery Court, but there was nothing specific at the time of the conference call.

The only issue that concerned me and was not really highlighted after the fact was inventory. Qualcomm’s inventory has been increasing steadily for six quarters. During that period it is up nearly 110% in absolute terms vs. only 37% for QCT (or chipset) growth. On a days-of- inventory basis, the company used to report fairly consistently in the 30-40 days range. Now it is 60 days. Add to that the CFO has acknowledged that channel inventory is at the high end of the company’s 15-20 week range, and management wants to bring it down over the next couple of quarters. Remember, building inventory adds to profits; reducing it has the opposite effect. This is an issue I am a little uncomfortable with.

• Verizon reported another solid quarter this week with few new surprises. The two critical segments (wireless and FiOS) each turned in very good performance.

New wireless subscribers were at 2.0 million, up from 1.6 million in the prior quarter, and the increase in data revenue from subscribers increased as well. It now stands at 21% of wireless revenue vs. 20% last quarter, with the average revenue per user (ARPU) up 47 cents from last quarter to $11.06. That’s steady improvement!

Skipping over to the FiOS side of things, the number of Internet subscribers increased 124% year over year to 1.5 million, with 21% penetration. FiOS TV subscribers crossed the 900,000 threshold, up more than 300% year over year with 16% penetration. The company’s DSL (digital subscriber line) business continues to be de-emphasized, with net additions (19,000) less than one-tenth that of FiOS in the quarter. That’s OK from my perspective because it is a far less-attractive service than FiOS.

One of the catalysts that may accelerate FiOS adoption over the next 12 months could come courtesy of Corning (GLW). Verizon didn’t mention it on its call, but Corning announced that it’s Clear Curve (bendable fiber) was successfully tested by Verizon in a field trial for a multiple-dwelling unit (MDU). Verizon plans to conduct another test, but there was no word on the timing or other details. However, Clear Curve is an essential element for bring FiOS to the masses in urban settings such as New York or any large city. Snaking fiber-optic cable through an apartment building’s infrastructure is a difficult task, and Clear Curve makes that possible.

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

Earnings Outlook • Alvarion generates very little commentary from the sell side, in part because none of the “major” sell-side firms cover the stock. And lacking that support, the stock tends to drift without any reason to pump up estimates.

On recent calls, management has referred to a number of large contracts that it was involved with and that they hope they’ll be able to announce one by year-end. While the company did that on Dec. 19, the “Tier 1” carrier remained unidentified -- as did the size and the timing. Consequently, it did little to support the stock. The company also held an analyst meeting in New York in January that generated little excitement.

Investors are looking for catalysts in this name. When the stock hit $14, it was being mentioned in acquisition rumors on a weekly basis. That’s not the type of catalyst I expect, but, as I have indicated before, 2008 is the year that WiMAX as a technology steps out onto the world stage. It would be a real boost for the stock if the company can provide some hard evidence that that is happening.

Alvarion is down nearly 50% from its high, and given the opportunity in WiMAX this year, this is as good a time as any for starting a position in this name.

• Cisco kicked off the “sky is falling” theme with its previous conference call in November when it reported that its U.S. enterprise business was actually down vs. the prior year. That will be the No. 1 focus of this conference call.

The recent results from Juniper suggest that demand at service providers and enterprise remains solid, but it won’t surprise anyone if they hear that financial services customers are on the soft side. That’s a given. But Cisco’s business in emerging markets, as well as its Advanced Technologies, should provide a solid quarter.

Obviously, the outlook will be critical, but this stock has been soundly punished (down 30%) since its last call vs. the market (the Nasdaq is down 17% in that same time period). So it’s time for some relief.

Cisco is the prototypical “core holding” in any technology/telecom portfolio. I doubt the stock is going to run away from you based on earnings, so if you don’t have a position in this name yet, you may want to wait.

• Google is one of the more difficult companies to collect data on leading up to an earnings announcement. It is very much a black box and, consequently, the Street frequently uses proxies in place of the actual data. One example is the comScore U.S. Search Engine Rankings. In its most recent publication, Google’s market share dropped 0.2% sequentially, and this has set off “concerns” relative to the quarter.

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

Reliance upon such proxies is hit and miss, as in this case it’s domestic only and international revenue is now about 48% of the total. Add to that the fact that no one knows which searches are generating revenue or how much, and you can see how little the comScore data may actually be reflective of Google’s results.

But one thing is certain: Investors are nervous. We have seen that with any number of highfliers in recent weeks as they have transitioned from pure bulls to hardened skeptics. Right now, I’m more concerned with guidance than I am with the fourth-quarter results. Depending on what I hear on the call, this model portfolio position may be something I add to later in the week.

• NeuStar has the same disease as Alvarion; it’s not a flashy, high-profile name for the sell side. But it does “just execute,” and that’s what I am expecting to see more of when the company reports. NeuStar is driven by transactions generated by service providers (telcos and ISPs), and that business continues to grow. Generally, the company only comments on its outlook for the year, so this will be interesting given the Street’s expectation that NeuStar’s growth rate will slow to about 21% in 2008.

NeuStar is a great defensive name in this type of market, given that it’s a service provider being paid per transaction. Anytime the stock is below $30, it’s a good time to start a position.

• Some of the channel checks I have seen relative to Riverbed’s quarter suggest that the company met expectations. Based on what we have seen from F5 Networks (FFIV), Juniper (JNPR) and Extreme Networks (EXTR), customers are spending money. And I think that bodes well for Riverbed.

Equally important, there is nothing in the feedback thus far to indicate that the March quarter will not be at least in line with the current consensus. My understanding is that there are one to three large contracts the company is trying to close currently, so if they do, that may provide some upside. However, if they have not closed yet, they would impact guidance.

I am still of the belief that Riverbed is particularly well positioned with its technology, until the company proves otherwise. However, given its volatility, this is not a name to jump into ahead of earnings.

• Shares of SiRF Technology have been brutalized in recent weeks and with them the February calls in the model portfolio. Despite the negative commentary on the overall holiday selling season, personal navigation devices (PNDs) were one of the hottest items available. Part of the attraction was the very aggressive pricing among a number of vendors creating stockouts in some cases. While that may hurt the OEM’s margins, it still should have been a net positive for SiRF.

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

One way or the other, the model portfolio’s February calls will be closed out. The only hope at this point is that some of the loss can be made up. That is quite possible if the results are big, since the stock was among the leaders in names being shorted over the past month.

Inventory Monitor: Not Bad, All Things Considered This is the first meaningful look at inventory. Currently, 30% of my monitored universe of approximately 450 companies have reported.

As you can see in the chart below, aggregate inventory stands at 117 days of inventory. That compares with 121 days a year ago and 115 days exiting the third quarter. While it is an increase from last week’s metric of 116 days, it’s interesting that the vast majority of change came from the large Japanese companies.

Separating it into the two constituent parts, nearly 37% of the semiconductor companies have reported thus far. Days of inventory (DOI) stand at 68 days, vs. 72 days a year ago and up one day from the prior quarter. The customers (27% reported thus far) have DOI at 49 days. That compares with 50 days last year and 48 days last quarter.

Supply Chain - Days of Inventory

145 145 135 135 125 Total Supply Chain 125 115 115 105 105 95 95 85 85 75 Semiconductors 75 65 65 55 HW/Coms/EMS/Dist 55 45 45 35 35

/01 /02 /02 /05 /06 1/03 3/03 3/06 1/07 3/07 Q1/01Q3 Q1 Q3 Q Q Q1/04Q3/04Q1/05Q3 Q1 Q Q Q Source: Company Reports

To get a different perspective on the data, I took a look at what percentage of the whole I have thus far. Rather than simply look at the number of companies in any one group that have reported, I wanted to see how much of that group’s total inventory was represented by the data I had recorded.

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

The two charts below break that down for the universe as well as the various subgroups that I track. The two groups that jump out are semiconductors and the EMS/Distributors/Retailers. Both have a disproportionately higher amount of group inventory having reported thus far compared to the percentage of companies reported. Particularly with semiconductors, this suggests there is not likely to be much change going forward -- despite the fact that we have heard from just over one-third of the universe.

Even though the overall inventory level ticked up this week, I still feel pretty good about the number thus far. As I mentioned last week, the data tend to start out high earlier in reporting season and then work their way down. If that process holds true, we should exit the fourth quarter in fairly good shape. How that plays out in 2008 will depend on demand.

Q4 Inventory Monitor % of Group vs. % of Inventory 60%

50%

40%

30%

20%

10%

0% Universe Semis Customers Source: Company reports

Q4 Inventory Monitor % of Group vs. % of Inventory 50%

40%

30%

20%

10%

0% Computer Communications EMS/Disti/Retail Source: Company reports

(Continued on the next page)

Issue 303: Wednesday, Jan. 30, 2008

Model Portfolio Reporting Schedule With Estimates and Results I have updated the reporting schedule with results from the past week. Clearwire (CLWR) has yet to indicate exactly when it will report, but by the time you’ve received the newsletter it will have held an analyst’s meeting in Portland, Ore. I am not expecting the company to announce earnings at this conference, but it may provide a reporting date.

Model Portfolio Reporting Schedule With Estimates and Results Current Consensus Conf. Call Estimates Actual Results Date Time (EST) Revenue EPS Revenue EPS Apple Computer (AAPL) Jan. 22 5:00 p.m. $9.47B $1.62 $9.60B $1.76 Alvarion (ALVR) Feb. 6 9:00 a.m. $63M $0.04 -- -- Clearwire (CLWR) -- -- $47M ($1.02) -- -- Cisco Systems (CSCO) Feb. 6 4:30 p.m. $9.80B $0.38 -- -- Cypress Semiconductor (CY) Jan. 24 11:30 a.m. $439M $0.28 $431M $0.24 Dell (DELL) Feb. 28 5:00 p.m. $16.20B $0.36 -- -- eBay (EBAY) Jan. 23 5:00 p.m. $2.14B $0.41 $2.18B $0.45 Google (GOOG) Jan. 31 4:30 p.m. $3.44B $4.44 -- -- Level 3 (LVLT) Feb. 7 10:00 a.m. $1.08B ($0.11) -- -- Motorola (MOT) Jan. 23 8:00 a.m. $9.65B $0.13 $9.65B $0.14 Marvell (MRVL) -- -- $781M $0.11 -- -- Microsoft (MSFT) Jan. 24 5:30 p.m. $15.95B $0.46 $16.67B $0.50 NeuStar (NSR) Feb. 6 8:00 a.m. $121M $0.34 -- -- Qualcomm (QCOM) Jan. 23 4:45 p.m. $2.41B $0.53 $2.44B $0.52 Research In Motion (RIMM) -- -- $1.85B $0.69 -- -- Riverbed Technology (RVBD) Feb. 5 5:00 p.m. $71M $0.19 -- -- SiRF Technology (SIRF) Feb. 4 4:30 p.m. $101M $0.32 -- -- Microtune (TUNE) Feb. 7 5:00 p.m. $22M $0.03 -- -- Verizon (VZ) Jan. 28 8:30 a.m. $24.00B $0.62 $23.80B $0.62 Source: Thompson Financial, company reports

Issue 303: Wednesday, Jan. 30, 2008

Date Cost Basis No. of Amount Current % IXTC at IXTC Company Name Initiated per Share Shares Invested Price Gain/Loss Buy Date Return Apple Computer 02/15/2006 $ 100.56 300 $ 30,168.00 $ 132.18 31.44% 203.35 13.21% AAPL Alvarion ALVR 02/22/2007 $ 9.66 1250 $ 12,080.00 $ 8.39 -13.18% 249.10 -7.58% Clearwire CLWR 11/12/2007 $ 13.50 500 $ 6,750.00 $ 12.49 -7.48% 262.49 -12.29% Cisco Systems CSCO 03/30/2005 $ 18.03 300 $ 5,409.00 $ 24.36 35.11% 180.43 27.60% Cypress CY 09/14/2006 $ 23.71 1500 $ 35,570.00 $ 21.29 -10.22% 202.16 13.88% eBay EBAY 02/22/2006 $ 34.40 625 $ 21,499.25 $ 26.30 -23.54% 203.99 12.86% Google GOOG 02/09/2006 $ 454.68 45 $ 20,460.60 $ 548.27 20.58% 203.51 13.12% Level 3 LVLT 02/22/2007 $ 5.68 3000 $ 17,030.00 $ 3.24 -42.92% 249.10 -7.58% Motorola MOT 04/12/2006 $ 23.21 1000 $ 23,205.00 $ 11.34 -51.13% 219.66 4.81% Marvell MRVL 01/23/2007 $ 18.09 750 $ 13,567.50 $ 11.85 -34.49% 232.33 -0.91% Microsoft MSFT 09/26/2002 $ 27.57 1800 $ 49,620.00 $ 32.20 16.80% 92.19 149.72% NeuStar NSR 11/30/2006 $ 32.45 750 $ 24,337.50 $ 29.38 -9.46% 231.52 -0.56% Qualcomm QCOM 12/21/2006 $ 38.31 250 $ 9,577.50 $ 40.28 5.14% 237.13 -2.91% SiRF Tech (call options) QIRBD – 25 contracts 01/04/2008 $ 4.40 2500 $ 11,000.00 $ 0.10 -97.73% 247.78 -7.09% Research In Motion RIMM 11/19/2007 $ 105.65 75 $ 7,923.75 $ 93.79 -11.23% 267.65 -13.98% Riverbed Technology RVBD 07/26/2007 $ 45.26 225 $ 10,183.50 $ 22.74 -49.76% 269.12 -14.45%

(The model portfolio continues on the next page)

Issue 303: Wednesday, Jan. 30, 2008

Microtune 02/08/2007 $ 5.23 2500 $ 13,075.00 $ 5.96 13.96% 242.65 -5.12% TUNE Dell (call options) VPZAD – 20 contracts 12/06/2007 $ 6.80 2000 $ 13,600.00 $ 3.60 -47.06% 256.90 -10.39% Verizon VZ 10/19/2005 $ 31.64 250 $ 7,910.00 $ 38.25 20.89% 178.50 28.97%

The Telecom Connection Portfolio – Performance Performance results listed here reflect values of stocks as of the Total Average Return -2.53% close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. Sales are taken from the most recent 2008 YTD Return -17.96% purchase of that stock unless otherwise stated. The 2008 YTD Return figures reflect changes since the beginning of 2008. The Total Average Return figures reflect changes since inception on 8/14/2001.

Nasdaq Telecom Index Performance % Gain/Loss Since 2008 Portfolio Inception Open Level Current Level Portfolio Inception YTD Return Nasdaq Telecom Index (IXTC) 8/14/2001 270.32 230.22 -14.83% -9.92%

At the time of publication, Mr. Faulkner was long AAPL, ALVR, CLWR, CY, LVLT, MRVL calls, NSR, RIMM, RVBD, S calls, TUNE.

To see the full Telecom Connection model portfolio, including closed positions, visit http://www.thestreet.com/k/tc/portfolio.html

Issue 303: Wednesday, Jan. 30, 2008

Contact Info

Customer Service: Please email [email protected], or call 1-866- 321-TSCM (8726) Mon. – Fri. 8 a.m. to 6 p.m. ET; or outside the U.S. and in Canada, call 1-212-321-5200. Reader Feedback and Questions: Please send an email directly to Mr. Faulkner. Again, please direct all account-related inquiries to customer service.

Legal Information

This information is confidential and is intended only for the authorized Subscriber. Please notify us if you have received this document in error by telephoning 1-866-321-TSCM (8726).

Robert Faulkner, writer of The Telecom Connection, is a regular contributor to RealMoney, the premium subscription site of TheStreet.com. TheStreet.com, Inc. is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. The Telecom Connection contains Mr. Faulkner’s own opinions and is provided for informational purposes only. You should not rely solely upon The Telecom Connection for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in The Telecom Connection constitutes, or is intended to constitute a recommendation by Mr. Faulkner or TheStreet.com, Inc. of any particular security or trading strategy or a determination by Mr. Faulkner or TheStreet.com, Inc. that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

At the time of publication, Mr. Faulkner will be restricted in transacting for his own benefit in securities discussed in The Telecom Connection. Specifically, for securities mentioned in The Telecom Connection that Mr. Faulkner does not hold at the time of publication, he may enter orders to purchase such securities only after the hour of 10:30 a.m. ET on the trading day following the date on which the security is discussed in The Telecom Connection.

For securities that Mr. Faulkner holds at the time of publication of an issue of The Telecom Connection, Mr. Faulkner will not be permitted to sell the position until one month from the date the security was first recommended for purchase in The Telecom Connection.

For securities that Mr. Faulkner has held for at least one month following the date the security was first recommended for purchase, and which Mr. Faulkner now recommends for sale, he may enter orders to sell such securities only after the hour of 10:30 a.m. ET on the trading day following the date on which the security is recommended for sale in The Telecom Connection.

If you enter orders to buy or sell securities after 10:30 a.m. ET, it is possible that Mr. Faulkner may have purchased or sold such securities at a price more advantageous than the price you will obtain.