possibility of price cuts at the release of palomino (feb 15)
09:53am EST 12-Feb-01 Salomon Smith Barney (Jonathan Joseph 415-951-1887) DELL
The Semiconductor Beat
SALOMON SMITH BARNEY Industry Note
Semiconductors
The Semiconductor Beat
February 12, 2001 SUMMARY
* Expect a new wave of earnings warnings to come
Jonathan Joseph from our companies in coming weeks as they realize
415-951-1887 the guidance given only last month was too
jonathan.joseph@ssmb.com optimistic. The semiconductor sector should continue
Dunham Winoto to decline at least until August of this year, when
415-951-1875 comparisons get the toughest.
* In aggregate, the microprocessor market remains
below expectations, especially for Intel, who we
suspect is coming in short of plan. AMD seems to be
hitting plan (which means down units this quarter),
mostly due to relative strength in the European
"white box" market.
* DRAMs continue to weaken, with branded 64Mbs
falling 14% to $2.15 and 128Mbs 10% to $4.50.
Brokers are bracing for lower prices going forward.
* Flash spot prices also softened, with 32Mbs
falling about 9% to $21, 16Mbs flat, and 8Mbs down
4% to $8.33. For the first time, contract prices,
especially with cell phone makers, appear to be
coming under pressure.
OPINION: A NEW WAVE OF PROFIT WARNINGS AND A SLOW RECOVERY
For the pure contrarian, there is a lot to be happy about in semiconductor land
these days. Analysts are pretty uniformly negative. Estimates are coming down
sharply, and probably soon some of our companies will be losing money. Capital
spending is being slashed. Try to find a good endmarket to invest in: Dell
(DELL-$24, 3H) this week will probably announce its first layoffs in history,
underscoring the fact that demand for PCs is pretty bad. There was speculation
last week that Nokia (NOK-$28, 3M) was revising downward internal forecasts
from 180 million to 140 million handset units this year. While not confirmed,
our current estimate of about 173 million may be too high, as may b our current
estimate of around 500 million units worldwide, compared to consensus
expectations of 525-575 million units. Wireline? Cisco (CSCO-$28, 1H) says the
inventory cleanup will take at least two to three quarters. And that does not
count the inventory at contract manufacturers.
Given the weakness we are seeing everywhere, we expect a new wave of profit
warnings to begin in the next couple of weeks. Guidance given only mid last
month, as we suspected, is coming in overly optimistic. And our companies,
almost without exception, will likely be forced to revise that guidance down
again, just as National Semi (NSM-$23, 2H) did 10 days ago. It now seems
inconceivable that inventories in the wireless, personal computer, and wireline
markets will be worked off before the second half of this year. That means
those overly optimistic forecasts for 2H still have to come down sharply. As we
have mentioned, business will necessarily get worse going into August of this
year, which is the toughest comparison in 16 years. Bad news, plus time, is
equal to a bottoming in the sector. We are getting bad news. Now we need more
time.
MICROS STILL WEAK, ASIA MAY BE SLOWING
Sentiments remained negative among processor gray market brokers, while average
gray market prices for Intel (INTC-$34, 2M) processors widened further from a
3% to a 6% discount-to-list last week. Spot market prices for the company's
newly introduced Pentium 4-1.3GHz, in particular, fell a steep 19% from $435 to
$354. Though prices on Celerons only dropped about 2%, high-end 800MHz parts
suffered a sharper 10% decline. Supply was generally good across the board but
brokers remarked that demand slackened noticeably from last week's level.
After trading flat for three weeks in a row, average AMD# (AMD-$24, 2S) prices
rose on average 3%, almost solely due to an upturn in prices for the Athlon-
1GHz and 950MHz processors. On a relative basis, AMD does appear to be doing
better than Intel, though we still forecast them to see a sequential decline in
unit shipments this quarter. The reasons for AMD's relative strength are
several: 1) Availability of Via's KM-133 chipset, which includes some
integrated graphics, has just improved sharply, which is filling up the backlog
of demand for the Duron. 2) AMD has a better line-up with Thunderbird in the
1.0-1.2GHz market, which is where most of the high-end desktop has migrated.
Intel's PIII is pretty well stopped out at 1GHz, while the P4 has yet to catch
on to spur the 1.3-1.5GHz market segment. 3) If there is any firmness at all,
it appears to be in the European "whitebox" market, traditionally a stronghold
for AMD. There are reports that the company may move its scheduled price cut up
from March 5 to February 15, probably to coincide with the release of the
Palomino, a low-power version of the Thunderbird.
There are some mixed messages out of Asia-Pacific, obviously the most important
region for motherboard assembly in the world. Preliminary data from the top
three motherboard makers, including Asustek (2357.TW-3L, NT$140), Giga-byte
(2376.TW-NR, NT$93) and Microstar (2377.TW-NR, NT$87), show units down 8% and
revenues down 15% from December to January, in line with or slightly better
than consensus expectations. The consensus view is that decline was mostly the
result of the Chinese New Year shifting from February to January. In other
news, Jason Lin, our Taiwan PC analyst, is hearing from Acer for the first time
that PC demand in China may be running below expectations year to date, a
development we will keep an eye on.
DRAM CONTINUES ITS RECENT DOWNTURN
Not surprisingly, demand for DRAM in the spot market was soft last week,
forcing prices for "branded" 64Mb SDRAMs down a hard 14% from about $2.50 to
$2.15, which follows a 4% decline a week ago. Unbranded 64Mbs broke the $2.00
mark for the first time, trading as low as $1.90. Meanwhile, 128Mbs traded down
10% to $4.50. Reliable brokers are telling us 128Mbs will be at $4.00 in a week
or two, and some suppliers are bracing for $3.00 prices in coming months. We
believe all suppliers are losing money at current price levels. Unfortunately,
most brokers see no end in sight for lower prices, with name-brand OEMs pricing
aggressively. The problem almost certainly is not supply, but demand. Though
one major broker we spoke with reported that demand from China (see the note
above) and Europe was firm, it was not enough to offset the weakness in other
markets. Another broker noted that short-term attempts to rally prices have
failed because there is still plenty of inventory in the channel.
FLASH REMAINS WEAK; CONTRACT PRICES COMING UNDER PRESSURE
The Flash market these days is looking more and more like DRAM with parts
readily available on the spot market, and in the face of slowing demand, weaker
prices. 8Mb and 16Mbs are now widely available, which is quite a reversal from
several months ago when these parts were in tight supply. While weakness in the
PC and wireless endmarkets is hardly a surprise, slowing demand from consumer
electronics, previously a strong area of growth for Flash, is starting to worry
many market players. For the first time, we are hearing anecdote that leads us
to believe contract prices will soon come under significant pressure. We are
getting reports that European Flash suppliers are being told by leading cell
phone makers to revise downward contract prices by 25-30%. In a slowing
environment, everyone shares the pain.
In last week's Semi Beat we wrote that 16Mbs, which mostly go into cell phones,
took the hardest hit, falling about 20.5%. This week 16Mbs were pretty stable
at about $7.75, but other parts fell significantly. High-end 32Mbs fell 8.7%
from $23 to $21, 8Mbs lost 3.8% from $8.67 to $8.33. On the low-end, 4Mbs were
flat as well at $6, while 1Mbs (used in PC BIOS) fell a slight 1.2% from $4.20
to $4.1 |
