Dan et al, I can one up that quote from Craig. How about this quote found in the following article from our very own Bing Yeh:"I don't believe we have reached a peak," said Bing Yeh, president and chief executive of SST, Sunnyvale, Calif. "My feeling is that this upcycle will last at least four years." I just love the part about FOUR YEARS!
ebnonline.com
Is chip outlook's bubble about to burst?
July 8, 2000
By Bolaji Ojo
Electronic Buyers' News
(07/07/00, 05:07:17 PM EST)
Is the semiconductor market's two-year upcycle winding down?
The mere suggestion provoked a furious rebuttal last week from bullish industry leaders, whose cries of protest sought to drown out the dissenting opinion of a lone Wall Street analyst.
But despite repeated assurances that the sector's fiscal outlook is still positive, a number of fundamental questions remain unanswered: How reliable are current component and OEM sales forecasts; will rising capital expenditures lead to overcapacity, and if so, when; and are clouds gathering on the chip horizon or only in the eye of one observer? In other words, how healthy is the semiconductor industry really?
Coming so soon into an upturn that many predict will last up to four years, these were not questions the semiconductor industry was expecting. But in a report released last week, Jonathan Joseph, an analyst at Salomon Smith Barney Inc., San Francisco, cast doubt on assumptions that the current chip upturn will stretch well into 2001 and perhaps beyond.While not forecasting a downturn, Joseph's report noted that a “slowdown in the [semiconductor] group may take six to nine months ... given what we believe are slowly reversing industry fundamentals.”
Drawing a bead on several leading semiconductor companies, particularly in the area of flash memory, Joseph lowered his ratings for Advanced Micro Devices Inc., National Semiconductor Corp., Silicon Storage Technology Inc., and Texas Instruments Inc.
“For most of this year, we have become increasingly concerned about the top-down picture, but have been reassured the upcycle was intact as lead times continued to extend, prices firmed, and inventories remained low,” Joseph said. “The bottom-up picture, however, went cautionary recently, apparently brought on by a slight slowing in cellular-phone growth expectations and the rapid increase in capacity. We do not believe summer slowing is the culprit.”
Joseph lowered his rating on the semiconductor industry to “neutral” from “outperform” based on the following observations:
- Capital spending growth should peak this year, and peak years in capital spending closely correlate with peak years in semiconductor growth;
- Unit growth reached 34% in February, an all-time high, but has fallen three months in a row, settling at 30% in May;
- Lead times for components such as power amplifiers, DSPs, and tantalum capacitors are contracting;
- Average selling prices of some commodity components have begun to moderate in the spot market;
- Inventories are rising at semiconductor companies and contract manufacturers.
Many industry executives dismissed Joseph's report as too general, while several analysts faulted some of his assumptions, including his emphasis on capital- expenditure growth. At Texas Instruments, SST, and National Semiconductor, miffed executives disagreed that the semiconductor industry-and their segments of the business in particular-may be headed for slower revenue growth.
“Nobody has a perfect crystal ball, but the signs we're seeing are pointing to a lot of strength not only this year but for 2001,” said Ron Slaymaker, vice president of investor relations at TI in Dallas.
“I don't believe we have reached a peak,” said Bing Yeh, president and chief executive of SST, Sunnyvale, Calif. “My feeling is that this upcycle will last at least four years.”
Based solely on such industry anecdotes, Joseph's expectations of a potential reversal in the chip market and especially flash memory may seem inaccurate. Industry executives at SST and Samsung Semiconductors Inc., San Jose, said their flash-memory production for 2000 and the first quarter of 2001 are already sold out.
“We don't see a slowdown three or four quarters from now,” Yeh said. “We're taking orders now for the second and third quarters of 2001.”
Similarly, at Samsung all memory chips are in short supply, and the situation is getting worse, according to Bob Eminian, vice president of marketing.
“We only see a very tight market for some time to come,” Eminian said. Samsung is also sold out of SRAMs for nine months, and DRAMs are sold out well into the fourth quarter of this year, he added.
In the DRAM market, Hitachi Semiconductor (America) Inc., San Jose, said demand continues to exceed available industry supply. Ron Bechtold, vice president of the company's DRAM division, sees no change in sight.
“The proof is that DRAM prices continue to rise on both the spot market and on OEM contracts,” Bechtold said.
National Semiconductor executives said they were “quite bemused” by assertions that the company's position may be weakened by exposure to the cellular-handset and commodity-analog markets, as noted by Joseph in his report.
“Our business looks solid. We aren't seeing anything that would change our guidance to the Street,” said Pat Brockett, executive vice president of analog products at National, Santa Clara, Calif. “We're not seeing lead times coming in-for that matter, they've never gone out. We've been judiciously expanding our capacity for the last five quarters, and we've held lead times in the six- to eight-week range. We haven't put anything we sell on allocation,” Brockett said.
National draws about a quarter of its revenue from wireless; however, Brockett emphasized that a significant portion of that amount is sold into infrastructure equipment, which is growing by leaps and bounds and is far less subject to market fluctuations than handsets.
“To draw a conclusion that we've got a weakness in 25% of our business-which by the way, we're not seeing-while holding our earnings-per-share forecast is very strange,” he said. Neither is National's commodity-analog business-roughly 15% of revenue-under price pressure, the company said. Rather, the products are experiencing robust sales in the distribution channel.
National gauges the market by looking at long-term trends in demand for certain circuits. Some 85% of its products are proprietary, requiring close design-in relationships with customers. In this way, National can get good forecast data from customers, Brockett said. The company also looks at industry projections for PCs, peripherals, handsets, and the general economy.
“There's nothing we're seeing that would say the market isn't going to grow somewhere around 40%
this year and have another healthy year next year,” Brockett said. “Even if industry growth next year cooled off to 25%, I wouldn't call that a slowdown.”
A spokeswoman for Infineon Technologies AG, Munich, Germany, said the company sees no signs of a slowdown in the immediate future and that orders for Infineon's products continue to exceed manufacturing capacity.
“Our backlog is very good, between six and 12 months out,” she said. “There are no worries here at all. Business is still very positive.”
In fact, the future appears so rosy at Infineon and several other chip makers that many companies have taken to pre-announcing positive second- and third- quarter results. In June, Infineon raised its fiscal 2000 third-quarter income estimate and advised investors that “higher memory prices, which have been rising sharply since June, as well as above-average productivity gains, if continued, are likely to lead to even higher income in the fourth quarter.”
Executives at Future Electronics Inc., a top-tier electronic-components distributor, said signals from their chip customers do not indicate a slowdown in the year ahead.
“At this point in time, demand is excellent and we don't see any signs of weakness in our semiconductor segment,” said Bob Vaupshas, vice president of marketing at Future, Pointe Claire, Quebec. “Our backlog is very strong, about six to 12 months out in certain segments.” Salomon Smith Barney's Joseph does not dispute the likelihood that several segments of the semiconductor industry will continue to witness strong growth in the next several quarters.
However, he noted that next year the industry is unlikely to repeat or exceed the more than 30% revenue growth forecast for 2000. Joseph said capital expenditures should peak this year, signaling the beginning of a slowdown in semiconductor revenue growth.
“We started 2000 with a forecast of 35% capital spending growth, which was revised upward to the point that we are now anticipating 60% capital spending growth,” Joseph said in his report. “We are currently forecasting 35% capex growth for the industry next year. That estimate may be low, but it is unlikely that capex will grow greater than 60%, which means this year is the peak.”
While Joseph's emphasis on capital spending drew some flak from analysts, others contend that his outlook is not off course and could even be considered slightly optimistic since it predicts continued unit growth.
“As an economist's outlook, Joseph's is still very optimistic,” said Jim Haughey, EBN's staff economist. “The huge price premium some suppliers have been enjoying because of component shortages will disappear. By this time next year, they'll be eking out more modest price advantages and perhaps giving back.”
Other analysts noted that a direct link could not be drawn at this stage of the industry's upturn between revenue growth and capital expenditure.
“It might be possible to make a case that the cycle is about to roll over if capital spending has reached dangerous levels,” said Joseph Osha, an analyst at Merrill Lynch & Co. Inc., New York. “It's very hard to find any evidence of a real end to the upturn that began in late 1998, however.”
Recent statements by some mobile-phone OEM executives indicating that unit shipments may be lower than expected may have triggered some of the concerns Joseph raised in his report. Such estimates for cell-phone unit shipments this year have ranged from 400 million to more than 500 million units.
“Playing the match to the powder keg of investor uneasiness has been the wireless industry. Wireless-handset expectations of 500 million units were unreasonable,” Osha said.
“Unreasonable expectations combined with unreal and largely irrelevant spot prices have resulted in some investors calling a fundamental downturn in what is a rapidly growing and healthy industry.”
Accurate forecasting may solve these kind of problems, but that's another issue the entire electronics industry is grappling with and one it is unlikely to reach a consensus on, another analyst asserted.
“The current dislocation in supply vs. demand will not approach equilibrium at least until the middle of next year,” said Sudeep Balain, an analyst at Chase H&Q, San Francisco. “It's way too early to make the call that more supply has caught on already in the marketplace and that the semiconductor companies are seeing ASPs degrade and lead times come in. That is just not the case.” |
