Motorola was upgraded at Piper Jaffray to Outperform from Market Perform and raises their target to $14 from $10. The firm says that prior limited visibility has improved, stale handset portfolio risk is beginning to mitigate, and an overall improvement in the business environment in the U.S. and China is expected to bode well for MOT's PCS, SPS, and CGISS business units.
Semiconductor Equipment . . . Goldman Sachs turned negative on Semiconductor equipment. "We are incrementally more negative on the semi equipment stocks," Goldman said. "While we remain convinced that the equipment industry has begun a cyclical upturn and that the stocks won't peak for the cycle until the industry reaches normalized levels of cash flow in early 2004, we believe it is likely that the stocks will trade down 15 percent before resuming their upward move. The potential catalyst for the sell-off is the equipment companies offering conservative fourth quarter sequential order guidance."
KLA-Tencor added to JP Morgan's Focus List and sets a $77 target. Shares are trading at a modest premium (17.2x) to the group (16.5x) based on their 2005 estimare, and also trade at a substantial discount to AMAT (23.6x) and NVLS (32.0x), which they do not believe is indicative of the company's attractive business model and earnings power. Also, firm says margins are poised to significantly exceed consensus, checks suggest KLAC will receive large orders from Samsung and other Asian customers in 3rd quarter-4th quarter, company should deliver historically high cyclical growth based on pricing power and increasing process complexity, and return metrics and earnings quality exceed all peers. Target is $77.
Semiconductors . . . Semi Equipment book-to-bill disappoints. Goldman Sachs calls the SEMI August book-to-bill of 0.91 disappointing, as it came in 0.07 below firm's estimate and 0.08 below Wall Street views. Overall orders were up 2% month-over-month off a downwardly revised base (7% below Goldman's original est). Firm views the data as further evidence that while fundamentals continue to gradually improve, expectations for fundamental improvement have outpaced reality. Until expectations for fundamental improvement reconnect with reality, firm believes the equipment stocks may see a 10-15% pullback near-term.
Intersil exects to post 3rd quarter earnings of $0.15 on revenues of $129-132 million versus consensus $0.15 and $130.85 mln. Due to company's healthy balance sheet and steady financial performance, ISIL has declared a quarterly cash dividend on its common stock of $0.03 per share.
While there have been no real surprises by Intel at IDF, the company's strong product and manufacturing positioning reinforce our long-term Outperform thesis on the stock. Though the company does not comment specifically on business conditions at IDF, Paul Otellini in his keynote did make an upbeat comment in noting that 2003 is the first in many years for the PC industry to see double-digit unit growth. Intel provided the usual updates on its product roadmaps. The one desktop product that was introduced, the Pentium 4 Hyper Threaded Extreme Edition targeted mainly to PC enthusiasts and gamers, seems to be a calculated move to undercut the launch of AMD's Athlon-64 next week. Intel also detailed its roadmap for dual-and multi-core server processors, and the second-generation Centrino platform. While talked about for several years now, the Digital Home initiative is expected to gain some traction next year when guidelines on standards are released by DHWG in 1st half 2004. From Intel's perspective, the interoperability between the PC and various consumer electronics and mobile devices is expected to drive demand for processing power, wireless networking devices, and products for media servers. In a memory session, five major DRAM companies discussed the outlook for DDR2. Though all manufacturers indicated they are ready for DDR2 and foresee a smooth transition, we need to see if validations proceed smoothly before knowing whether significant premiums may arise and who will benefit. We expect Samsung's wider BGA packaging capabilities to be an advantage over competitors in the DDR2 ramp. Continue to like Intel stock, due to: 1) overall strength in notebooks and higher ASPs due to favorable product mix, 2) margin expansion, 3) a successful business model to leverage when IT spending accelerates. Two current trends facing the PC market favor Intel over AMD: (1) overall shift from desktops to notebooks, (2) shrinking portion of the white box market.
More on Intel Product roadmaps: shift in focus to feature enhancement. Intel's focus in its microprocessor business has clearly shifted to the addition of new features that enhance end-user experience, rather than simply increasing processor speed. Otellini spent considerable time in his keynote discussing two upcoming technology enhancements to its microprocessor products, termed LaGrande and Vanderpool. LaGrande, a security technology that Intel previewed last year, is a hardware enhancement that will work with system software to prevent software-based attacks, but will not eliminate the need for anti-virus software. Vanderpool, meanwhile, is a new hardware partitioning technology that Intel disclosed for the first time, which is expected to be available within the next five years. The enhancement will augment software by allowing processors to perform widely divergent operations at the same time, such as running two different operating systems or interactive programs simultaneously on different systems.
WLAN roadmap on track. In his keynote, Paul Otellini appeared to counter prior comments from the company that the 802.11a/b chipset has been slightly delayed to early 4Q, noting that the company would ship its 802.11a/b chipset this month. This will be followed by 802.11g by the end of the year, and a/b/g in the first half of 2004, in line with prior comments from the company. Intel also plans to introduce new low power 802.11 chipsets for the handheld market.
* Desktops: new P4 processor undercuts Athlon-64 launch. Intel did announce one new desktop product, named the P4 Hyper Threaded Extreme Edition, targeted towards the gaming and PC enthusiast market, the first time Intel has specifically addressed this sub-segment. The Extreme Edition will run at 3.2GHz, and the major improvement over the current Pentium 4 is the inclusion of an on-die 2MB L3 cache. This on-die L3 cache is in addition to the 512KB
L2 cache, giving the Extreme Edition a total of 2.5MB of on-die cache, and makes the chip similar to the Xeon MP. Intel's move seems calculated to undercut the launch of the Athlon-64 from Advanced Micro Devices next week.
* Notebooks & Cellular: "Wireless will spur the next cycle of growth". On the notebook front, Intel gave further details of Dothan and outlined future plans for Centrino. The Dothan will debut at 1.8 GHz in 4th quarter and rise to 1.9/2.0 GHz next year. The product appears to be more than just a die shrink to 90nm, with better power saving capabilities and a massive 2MB L2 cache. Additionally, the company plans to introduce its second-generation Centrino platform,
code-named Sonoma, in 2nd half 2004, which will be paired with the Dothan microprocessor and include support for DDR2 memory. The platform will include a chipset code-named Alviso, and integrated 802.11a/b/g WLAN capability. With Sonoma, Intel also demonstrated technology that allows users to move from hot spot to hot spot without interrupting file transfers, which believe will be a factor in aiding the adoption of Centrino technology. Intel also announced plans for its next-generation XScale processor. Our hardware analyst, Andy Neff, has termed wireless computing as a "killer app", which is leading to increased demand for computers. We concur and believe the revenue strength that Intel has seen in 2nd quarter and 3rd quarter has no doubt been substantially due to the strength in Centrino.
* Servers: dual- and multi-core roadmaps detailed. With regards to its server roadmap, Intel outlined plans for two new chips that will have two or more processors on a single chip. The new chips are a 32-bit Xeon server processor, code-named "Tulsa," Intel's first dual-core chip which will be available in the next two to three years, and a new 64- bit Itanium server chip, code-named "Tanglewood" (follow-on product to Montecito) with availability after 2005.
This will be the first multi-core Itanium processor (more than two cores on one die).
* Digital imaging represents new area of growth for IA. Intel demonstrated the MXP5800 processor that it announced last week, which is a dedicated digital media processor whose architecture is optimized for the document imaging market, for use in products such as digital copiers, scanners and printers. Image processing functions have traditionally been handled by ASICs, and the product family represents a new revenue stream for Intel. The company also said it may follow on with products for personal video recorders and similar devices.
* Manufacturing: 300mm and 90nm transitions on track. Yield rates on 90nm have reached the level necessary for volume production ramp, and the Prescott and Dothan products are on track for revenue shipments by the end of this year. With regards to its future process roadmap, Intel said the first 65nm wafers will be produced in 2005, and that 45nm will come in 2007. Intel has also already made prototypes using a 32nm process slated for 2009, as well as a 22nm process technology for 2011. The fact that 90nm is a technology that will run exclusively on 300mm wafers (0.13-micron is being run on both 200mm and 300mm) and the transition to both of these new technologies should help Intel lower the unit costs on its products, and is one of the reasons for our expectations of margin expansion in 2004. Notably, Intel is converting several of its 200mm facilities to 300mm production, for which incremental investment is minimal.
* Digital Home initiative expected to gain some traction in 2004. Intel continues to emphasize the importance of digital home, which essentially relates to the interoperability between the PC and various consumer electronics and mobile devices, and points towards the convergence of home computing and entertainment. This is a theme that the IT and CE industries have been discussing for several years, and progress continues in laying out the standards and infrastructure for distributing digital media in the home. Guidelines from the Digital Home Working Group are expected in 1st half 2004, and first products based on those standards are expected in 2nd half 2004. The availability of digital content over broadband is the next significant hurdle, and a critical mass will be necessary before content providers are willing to deliver the content. To facilitate the availability of premium content, Intel has addressed the issue of copyright security by developing a protocol called DTCP/IP (digital transmission content protection over IP) which allows for secure wireless transmission within the home. From Intel's perspective, this interoperability is expected to drive demand for higher processing power, wireless networking devices, and in some cases, products for media servers.
* DDR2: next generation memory standard for computing. Analysts attended a memory session in which five major DRAM producers (Samsung, Hynix, Micron, Infineon and Elpida) discussed the outlook for DDR2 technology, the nextgeneration memory standard for the computing market. As a note, Intel's role in the memory market is only to ensure that memory technology is not a bottleneck to its platforms.
* Advantages over current DDR. The key difference between DDR2 and the current DDR is the doubling of bandwidth at equivalent memory core clock speeds, due to a 4-bit pre-fetch versus a 2-bit pre-fetch for DDR. This will allow DDR2 to be produced at the same clock speed as DDR400 but with twice the bandwidth. Apart from speed, the advantages of DDR2 include better thermals, lower power, a smaller package, and greater headroom for densities (up to 2Gb).
* Industry on track for 1st half 2004 introduction; high volumes not expected until 2005. All the major DRAM producers plan to begin DDR2 production in 1Q04, and Intel plans to introduce DDR2 capable chipsets in 2nd quarter 2004. DDR2 is expected to be used in servers initially, followed by desktops around mid-2004, and notebooks in 2nd half 2004. A significant ramp is not expected until 2005 and volumes are expected to reach about 10-20% of total DRAM production in 2004, or about 20-30% of total DRAM by end-2004.
* DRAM manufacturers do not foresee any major challenges. DDR2 is an evolutionary and not revolutionary technology, and DRAM makers have likened this transition to past product transitions, from EDO to SDRAM and SDRAM to DDR. However, highlight the fact that the transition from SDRAM to DDR266 was bumpy, with design problems at a number of manufacturers leading to a lack of supply and resulting in premiums that exceeded 100%. Though all manufacturers have indicated that they are ready for DDR2 and that the ramp rate now depends on the demand side, we need to see if the validation process proceeds as planned before we really know which manufacturers can ramp at the highest rate and benefit from price premiums. At this point, we would highlight that one area that might be an issue is the shift from TSOP to BGA packaging with DDR2. Samsung's existing BGA capabilities from its graphics and Rambus DRAM is an advantage to allow it to ramp quickly.
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