Wednesday May 2, 8:29 pm Eastern Time
Chip sales fall, but recovery seen coming
(UPDATE: Adds analyst, executive comments, background, recasts throughout)
By Nicole Volpe
NEW YORK, May 2 (Reuters) - While sales of computer chips slumped in March, some analysts
and companies are increasingly confident bloated inventories will be burned off by September and demand will snap back in the
fourth quarter.
In fact, the technology sector at large was showing signs that the bad news was
coming to an end, analysts and corporate executives said at a technology
conference here.
``People were sensing a deterioration and that things were getting worse at a
faster pace in the first-quarter. Now it seems like they have stopped getting
worse or they are getting worse at a slower pace,'' Steven Milunovich,
technology strategist at Merrill Lynch said.
``It's like we've stopped hitting our head against the wall, which feels good,'' he
said at the Merrill Lynch Hardware Technology conference here.
Milunovich, one of Wall Street's most influential technology analysts, said that
he was still cautious about whether a recovery in technology stocks was
beginning, and that he would ``go light'' on such stocks.
Investors betting tech stocks would benefit first from a resumption of healthy economic growth, however, pushed the Nasdaq
composite index (^IXIC - news) to the highest levels in nearly two months on Wednesday.
``We're seeing a rotation into technology,'' said Alan Skrainka, chief market strategist at Edward Jones. ``There's a growing sense
that the U.S. economy has bottomed out and will show improvement in the months ahead.''
CHIP INDUSTRY RECOVERY LATER THIS YEAR
Worldwide sales of computer chips fell 7 percent in March due to an oversupply of chips and a weaker economy, the
Semiconductor Industry Association reported on Wednesday, but said a recovery should start later this year.
``We continue to believe that the industry will complete the inventory correction in the third quarter and the recovery will commence
in the fourth quarter,'' SIA President George Scalise said in a statement. ``Since last November, we have witnessed worldwide
semiconductor sales continually decline due to an inventory overhang and macroeconomic factors.''
Worldwide sales of computer chips in March fell 7.1 percent to $14.4 billion from $15.5 billion in February, the San Jose,
California-based SIA said on Wednesday. The March sales were off 4.5 percent from $15.07 billion a year ago.
Semiconductor makers have posted weaker profits in the first quarter with few positive signs in sight, amid slow sales of everything
from personal computers, to wireless phones, to networking equipment. But at the same time, an upbeat outlook from some major
technology players, including top chip maker Intel Corp. (NasdaqNM:INTC - news), has helped build the current, growing optimism
for a recovery in the second half of the year.
``Their (chip companies's) best estimate is that business can't get any worse,'' said a fund manager who didn't wish to be named.
``Certain companies had no orders in April -- that's got to be as bad as it gets.''
NUMBERS TO GET WORSE BEFORE THEY GET BETTER
The SIA numbers -- culled from companies across the globe -- are a closely watched indicator of semiconductor sales, albeit a few
months old. SIA member companies make up more than 90 percent of U.S.-based semiconductor production.
``The numbers are continuing to get worse and they'll be worse in April and the month after that, and probably won't bottom until
July or August,'' Lehman Bros analyst Dan Niles said. ``We think year-over-year chip sales comparisons will bottom at 20 or 25
percent, so we still have a ways to go.''
That's especially true for communications chipmakers.
``I'd say right now we're still seeing order delays,'' Broadcom Corp. (NasdaqNM:BRCM - news) Chief Executive Henry Nicholas
said in an interview. ``Visibility is not great.''
Nicholas also said he expects the data networking industry, which has been caught up in a slump for months, would see its next
period of growth in the fourth quarter.
Still others are beginning to see a bit of light.
Brocade Communications Systems Inc. (NasdaqNM:BRCD - news) Chief Executive Officer Greg Reyes said his data storage
products company was poised to meet or exceed Wall Street's profit expectations for its fiscal third quarter as customers rekindle
technology projects.
``It feels a lot better today than it did,'' Reyes said at the Conference. ``My sense is what is happening is that things are getting
approved on a project basis.''
Also, the PC industry now seems to have bottomed out and the second quarter will likely mark the trough for that industry and the
portion of the chip industry that is tied to the PC business, analysts and executives now say.
``The communications business is not recovering yet, but the PC and computers business is now beginning a slow recovery,''
Advanced Micro Devices Inc. (NYSE:AMD - news) Chairman and Chief Executive Jerry Sanders said at the conference.
``This means to me that the second quarter is the trough for the entire chip industry,'' Sanders said.
Among technology stocks, Brocade rose $6.98, or 16 percent, to $49.94 on Nasdaq, while AMD gained $1.09, or 3.4 percent, to
$32.95. Cisco Systems Inc. (NasdaqNM:CSCO - news) surged more than 10 percent in heavy trading after an influential analyst
said the large corporation networking market in North America, a big segment for the world No. 1 networking firm, was stabilizing.
While there were signs of improvement, analysts cautioned that there was still a chance for more bad news.
``There are glimmers of improvement, I don't think anyone is willing to call a trend yet. Although I think the market is reacting, this
could absolutely be a head-fake,'' Merrill Lynch analyst Thomas Kraemer said. |
