<font color=black>SSB is finally on amd's side
06:48am EDT 22-Sep-00 Salomon Smith Barney (Jonathan ................................
UNIT SHIPMENTS COMING UP LIGHT
Several weeks ago we noted that investor expectations for double digit
microprocessor unit gains out of Intel in Q3 were overly optimistic. Given the
continuing weak PC build, we had become increasingly concerned that even our
own forecast of 8% sequential growth was too high. Apparently it was. We
believe there are several primary issues plaguing Intel on the unit front. 1)
The transition from tight supply to loose supply almost always creates order
cancellations, despite a manufacturers' best efforts to "scrub" the order book.
The simple reason: double booking is commonplace during shortages, and does not
become apparent, even with one's best customers, until the end of a quarter. 2)
PC demand is coming in weaker than most PC component suppliers thought. As we
have written over the last several months, the personal computer market has
been slower to pick up than we earlier anticipated. The Back to School build
never materialized, and the Christmas build has now been pushed out to early or
mid-October. That is not to say we there will be no seasonal pickup in PC
demand, only that it will likely be somewhat weaker than many investors
originally anticipated. On a regional basis, Intel has suggested virtually all
of the $400 million revenue shortfall relative to our estimate came from Europe
(gas strikes, weak Euro and all that stuff). When we plug in the numbers,
however, none of the other regions amount to more than 6-8% sequential growth,
which was well below forecasts of only a few weeks ago. We will likely see
further slowing going forward. For example, Asia-Pacific, which rose 45% yoy in
Q2 probably grew only 35-38% in Q3, and will likely decelerate further in Q4.
In addition, the W2K buildout appears to be delayed in the U.S., which could
prevent a significant rebound in that market.
CHALLENGES AHEAD IN NEW PRODUCT TRANSITION
We believe the significant challenge for Intel in the next 6-9 months is its
transitions from the old PIII architecture to the new P4 architecture. As Intel
management commented at the recent Developer Forum, the PIII was never designed
to run much above 1GHz. Largely for that reason, yields at that speed grade and
higher remain below average, and the 1.13GHz product was recalled. Meanwhile,
we do not expect the P4 to hit large volumes until mid-2001. It has two
problems: 1) the P4 is wholly dependent on RDRAM for its primary memory. Intel
bet heavily that RDRAM would be widely deployed by now, expecting it to be 20-
30% of the market in Q4. Instead, RDRAM, which is costly and does not show much
of a performance advantage, is only about one percent of the market currently.
Intel will not have its own SDRAM PC-133 chipset until mid next year, though it
may license Via to produce a chipset earlier. 2) the die size is large, and
some OEMs actually believe the P4 underperforms the PIII at certain speed
grades and in certain applications. For this reason, the P4 will probably not
be a compelling technology until the 0.13-micron process shrink ramps in volume
later next year. We believe the P4 will be a significant new architecture for
Intel, only that the transition will take 6-9 months to smooth out.
MORE COMPETITION COULD MEAN MORE PRICING PRESSURE
Over the next 12 months three x86 players will make their presence increasingly
felt in the market, which could force Intel to sharply cut prices, as it did
when it drove Cyrix, once owned by National Semi (NSM, $42.94, 2H), and IDT
(IDTI, $98.56, 1H) out of the market 18 months ago. These players could amount
to an incremental 12-15 million units, which represents about 6-7% of the 200
million unit microprocessor market next year, or about a third to a half of its
incremental unit growth. These are the three players:
* Advanced Micro# (AMD, $27.56, 2S) will likely increase its unit shipments
from 28 million this year to 32 million in 2001, an estimate that is probably
too conservative. The company is executing very well in its ramp of the
Dresden fab, which should generate about 5,500 new wafer starts per month
when fully ramped, about equal in output to the current fab in Austin. AMD
seems to be having better luck at the high end than Intel. Its current
average speed mix is above 800MHz, we believe, which puts it above Intel's
700MHz. We figure that gap will only widen over the next six months as AMD's
next generation products, including a new T-bird, Duron, and Mustang (with
2MB of cache for server applications) come on board.
* Via Technologies has just announced its Cyrix III, which will be aimed at the
mobile market and run between 500-600MHz. We do not consider Via a powerful
competitor, but it could ship 4-6 million units next year, up from 1-2
million this year, which would represent about 2-3% of a PC market that may
grow only about 15% in 2001, at best.
* At least one other private microprocessor company is targeting the mobile
market and could capture between 2-4 million units next year.
CHANGES TO OUR MODEL: LOWER UNITS, REVENUES AND EARNINGS
Given the lower revenue outlook, we are cutting our Q3 unit forecast from 36.4
million (up 8%) to 34.9 million units (up 4%); we also reduced our unit
forecast for Q4 from 38.3 million to 36.9 million (up 5.7%). We cut our unit
forecast for the year from 140.7 million (up 26%) to 137.9 million (up 24%). We
have also trimmed our 2001 forecast from 161.8 million (up 15%) to 151.2
million (up 10%) units.
On a revenue basis, we trimmed our Q3 revenue estimate from $9.13 billion (up
10%) to $8.63 billion (up 4%).We are still forecasting a 5% sequential increase
in Q4 revenues, but revised that figure down from $9.8 billion to $9.1 billion.
In total, we trimmed 2000 revenues from $35.3 billion (up 20%) to $34.1 billion
(up 16%) and 2001 from $41.9 billion (up 19%) to $38.4 billion (up 13%). Due to
lower revenues and a highly leveraged model, we cut our gross margin estimate
for 2H from 64% to 62% and 2001 from 64% to 62%. Given the high level of
capital spending this year, probably somewhat weaker prices and slower topline
growth next year, Q2 may have been the peak in gross margins.
# Within the past three years, Salomon Smith Barney, including its parent,
subsidiaries and/or affiliates, have acted as manager or co-manager of a public
offering of this company.
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
Securities recommended, offered, or sold by SSB: (i) are not insured by the
Federal Deposit Insurance Corporation; (ii) are not deposits or other
obligations of any insured depository institution (including Citibank); and
(iii) are subject to investment risks, including the possible loss of the
principal amount invested. (c) Salomon Smith Barney Inc., 2000. All rights
reserved. Any unauthorized use, duplication or disclosure is prohibited by law
and may result in prosecution. Please refer to ticker SSBDISCL for important
Salomon Smith Barney Disclaimer information.
Jonathan Joseph 415-955-4998
First Call Corporation, a Thomson Financial company.
All rights reserved. 888.558.2500
-> End of Note <- |
