Despite the good news offered by Texas Instruments (NYSE:TXN) and others during this earnings season, there have been some disappointments. Applied Micro Circuits (NASDAQ:AMCC) is one of them. On Monday, Applied Micro pre-announced a revenue shortfall for its fourth fiscal quarter, causing its shares to plunge by about 20%.

Management now expects revenue to fall 8.5% sequentially, to around $70 million, compared to an original expectation of a 2%-5% revenue decline. Unfortunately, the bad news didn't stop there -- it expects a further 15% sequential revenue decline during the June quarter. This isn't a great business even during good times -- it spends too much on R&D relative to revenue and really needs higher sales if it is ever going to generate strong profits. With this news, it is officially following Conexant (NASDAQ:CNXT) down the wrong path.

So, what is causing Applied Micro's woes? Everything, apparently. The press release stated that revenue was weak in all product lines, and revenue to distributors, in particular, was anemic -- down 30% compared to the previous quarter. During the previous quarter, Avnet (NASDAQ:AVT), an electronics wholesaler, accounted for 26% of total revenue, so it isn't surprising that a slowdown is causing some pain.

Is there a bright side to the story?

Well, maybe. There has been a lot of griping about the state of semiconductor inventories -- I've even done some of it myself. Looking at Applied Micro's inventory growth -- inventory has surged by 80% compared to just 17% revenue growth over the past year -- and the fact that it's blaming the problem on distribution, my guess is that there are just too darn many of this company's chips out there. Hopefully, a little pain today will help to usher in a healthier tomorrow -- kind of like getting a shot in the rear.

We won't know how bad things are until the company reports full results on May 1. My hope is that we'll see inventory tick down a bit and hear some reassuring words that it isn't losing market share to competitors. In the meantime, I plan to hold my shares. With plenty of cash and no debt, I think this company can withstand a downturn.

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Fool contributor Dan Bloom owns shares in Applied Micro. He welcomes your comments and/or insight. The Fool has a disclosure policy.