listened to conference call after conference call with technology CEOs during the April quarterly earnings rush. The outlook was ugly, to say the least. So what happens? The stocks keep rising in the face of all the dismal financial news. This reminds me of the story of Cinderella when midnight is about to strike. (What? You expect me to read InformationWeek to my kids every night?) The recent rapid rise of communication semiconductor stocks may parallel the fairy tale. Whether these stocks also will enjoy a fairy-tale ending remains to be seen.

The recent earnings announcements and conference calls provided new insights into the state of the industry. Unfortunately, Cinderella's stepsisters were prettier than the current state of affairs. Let me review a couple of the more noteworthy conference calls.

Texas Instruments (TXN-NYSE) is the dominant player in communication semiconductors. TI makes everything from digital signal processors, which are, among other things, used in mobile handsets, to custom analog and mixed-signal processors. Illustrating how difficult the environment is, revenue declined 17% from the previous quarter. If this wasn't bad enough, TI expects that revenue will decline another 20% from this quarter's dismal results. The company's ownership of several semiconductor manufacturing plants means a high fixed-cost structure. Profitability was hard hit.

One of the hottest stocks in 1999 and early 2000 was Applied Micro Circuits Corp. (AMCC-Nasdaq). AMCC designs and makes a variety of chips for high-speed networking equipment and has one of the best portfolios of chips in the industry. Revenue this quarter was down 19% from the fourth quarter of 2000, and the outlook is worse, with sales expected to decline 35% from this year's first quarter. Management prefers not to speculate on whether we've seen the bottom of this semiconductor correction. As an indication of how bad things are, management as late as January thought its core market would grow 19% in this year's first quarter relative to the last quarter. It's now clear that growth will be negative; management has pretty much given up on forecasting the growth rate.

The field programmable gate arrays that Xilinx Inc. (XLNX-Nasdaq) makes can be easily reprogrammed and are therefore ideal for prototype and other early life-cycle equipment. Given this, Xilinx is often among the first to see renewed growth in the semiconductor industry. The next-generation wireless equipment should give Xilinx a nice boost in revenue, but deployment isn't scheduled until 2004. Revenue this quarter declined 9% from the previous quarter, and revenue for the next quarter is expected to be down 15% to 25% from this year's first quarter. Management is very cautious, and while orders in North America are stabilizing, European orders appear to be weakening.

None of the earnings reports in this industry could rival Cinderella's beauty, but there were some, if not bright spots, then areas at least not as dark as the others. PMC Sierra Inc. (PMCS- Nasdaq) reported a truly awful quarter, where revenue declined almost 50% from the fourth quarter last year. However, the sales force at PMC Sierra finally increased its weekly sales forecast after many months of revising it downward.

But after the recent run-up in stock prices, most of the communications integrated-circuit companies are trading at valuations that are double or triple what I would expect at the trough of a semiconductor cycle. Meanwhile, chip customers such as Cisco Systems, Lucent Technologies, and Nortel Networks have told investors that demand for their products is terrible. The weak demand stems from continued bankruptcies of alternative telecom carriers, funding problems for the few that remain, a gray market for almost-new equipment, and reductions in spending on communications equipment by major players such as AT&T, SBC, and WorldCom.

Given this, the fundamentals and the valuations awarded to these companies seem, to me, at odds. Is that a pumpkin I see?

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.