No sign of downturn
By Carol Haber
Until now, summer has almost always been a sluggish period for industry sales, allowing companies time to take a breather before the steep ramp for the most important sales season of the year, the fourth quarter and the holidays. Now, that phenomenon seems to be changing, at least for the moment, along with round-the-clock shifts in other areas of the globalizing high-tech economy.
Wilfred J. Corrigan, CEO, LSI Logic: Poised for accelerated growth.
There's no sign yet of the usual sluggishness associated with the September-ended quarter, when most of Europe is on vacation and the rest of the world does its best to follow suit. Orders for the summer period are surging and so are many companies' predictions for sales and earnings.
"The guidance on the third quarter is unusually strong and really does reinforce the lack of seasonality this year," said Charles Boucher, an analyst with Bear Stearns. Predictions are being fueled by stronger than normal results in the just-ended quarter.
"Programmable logic companies are looking at double-digit financial growth, which is very unusual for the September quarter," Boucher said. "Cypress Semiconductor is looking at something very close to double-digit sequential growth and Intel Corp. guided investors to stronger than normal growth going into the third quarter."
Texas Instruments Inc. and LSI Logic Inc. are in the same golden boat.
Dan Scovel of Needham & Co. pointed to a slew of factors driving the communications and consumer markets. "There could well be a tempering of the seasonal factors this year, next year, and maybe the year after that," he said, in part because of those products. Still, consumer sales are less than 20 percent of the semiconductor market, he noted. PCs stand at about 40 percent. "PCs need to hang in there," he said, referring to weakness in the U.S. retail channels reported by such companies as eMachines Inc., which last week reported a sharp decline in revenue for the just-ended quarter. "Communications appears strong," Scovel added.
Last week TI reported a strong second quarter and predicted accelerating growth in the summer period fueled by semiconductors. TI reported total revenue in the second quarter of $2.8 billion, up 19 percent from $2.4 billion in the year-ago quarter and up 7 percent sequentially. Semiconductor revenues were $2.4 billion, up 22 percent from almost $2 billion in the 1999 quarter and up 6 percent sequentially. Orders were $3.2 billion, up 26 percent from $2.6 billion in the year-ago quarter and up 12 percent from the just-prior quarter. Semiconductor orders grew 32 percent from the year-earlier quarter and 13 percent sequentially.
"Despite seasonal pressure, (TI) expects sequential revenue growth in its semiconductor business to accelerate in the third quarter, based on broad customer demand and strength in key markets such as wireless, catalog and broadband communications," the company said in a statement.
LSI Logic last week reported second-quarter 2000 revenues of $644 million, up 29 percent from $501 million in the same 1999 quarter. Net income before special items was $98 million, or 29 cents per diluted share, vs. $31 million, or 10 cents per diluted share. "With communications chip sales leading the way, LSI Logic is poised for accelerated growth in the second half," said Wilfred J.Corrigan, chief executive officer. "Based upon our bookings momentum and the global demand … we now expect communications products to reach 50 percent of the company's revenues by the end of the third quarter." That is earlier than previously anticipated.
The latest results from passive component companies such as Kemet, Molex, Vishay and AVX were also very strong (see story).
Earnings reports for the quarter ending in June continue to beat Wall Street's best expectations.
"Most of the earnings reports have exceeded expectations, not necessarily published expectations, but (the sometimes higher) real psychological expectations," Bear Stearns' Boucher said. "No one has been disappointed with revenues or earnings. Intel had a fairly positive number when you consider the different factors clouding operating earnings. Altera and Lattice both had exceptional quarters, stronger than people were expecting. Cypress, PMC Sierra and TriQuint Semiconductor were big upside surprises. The Wall Street consensus estimate for Triquint was 13 cents; they posted 19 cents —that's nearly 50 percent (upside). The Wall Street consensus for Cypress was 47 cents; they came in at 54 cents. That's not a one- or two-cents upside. It's major."
The strong industry upcycle continues to power sales, noted Arun Veerappan of Robertson Stephens. "The industry is still in the early stages of a buildout and it is still a capacity-constrained market," he said.
But stocks are schizophrenic. They are soaring with every glowing report and plunging on every negative sign.
Despite its strong results, LSI projected a slowdown in gross margin growth. Its stock continued on its now weeks-long downward spiral.
"Increased order momentum is causing the company to pull in its capacity ramp plans at Gresham by six months, causing its gross margins to ramp at a slower pace for the balance of this year and next, vs. previous guidance," said Sudeep Balain, an analyst with Chase H&Q. He is "tweaking down slightly" his revenue projections while "keeping EPS projections primarily by lowering the operating expenses to compensate for lower GMs."
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