SSB Semiconductor Beat - 9/4/01:
Semiconductors
The Semiconductor Beat
September 4, 2001 SUMMARY
* Our surveys suggest demand for Intel processors is
Jonathan Joseph tightening at both the high-end for 1.8-2.0GHz parts, but
also that the company may be cutting off the low-end
1.3-1.5GHz to shift the market higher, both positive
Ramesh Misra signs for demand.
* Following recent price cuts, the spot discount/list
price on Intel processors narrowed sharply from 29% two
Dunham Winoto weeks ago to 12% last week; the PIII discount/list also
narrowed from 22% to 17%. Intel's newest P4 and PIII
offerings, including the P4-2GHz and PIII-1.2GHz, hit the
market at a premium, a plus. AMD processor prices were
down a slight 1%.
* The DRAM market was slow last week, with 128Mbs easing
from $1.42 to $1.36 (-4.2%). Lower density 64Mbs closed
the week at about $0.69 (-3.2%).
* SIA July shipments fell a record 37%, compared to
June's -31%. Units also slowed to -25%, vs.-21%. We
continue to believe Q3 will be the cyclical low-point for
the sector.
P4 SEEMS TO BE DOING BETTER THAN WE ANTICIPATED
"It is with these baubles that men are led."
Napoleon Bonaparte to his generals discussing battle decorations and
Institutional Investor Poll results.
P4 could be running ahead of our estimates. Numerous inputs from the market
suggest Intel's most recent P4 price cuts are spurring stronger than expected
demand for the processor. Those aggressive price cuts, which averaged about
39%, are only a couple of weeks old, but they have already created a scramble
for Intel (INTC-$28, 1M) product at the low-end and high-end. We have heard
that the 1.8GHz and 2.0GHz processors are "hot", and that Intel has not been
able to meet initial demand for that high-end, price-insensitive market. In
addition, the company has been seeking to move the performance stack upward
into higher-performance and higher-price points. The 1.3GHz, 1.4GHz, and
1.5GHz P4s have been on the chopping block for the last couple of months, as
Intel tries to move the market to a 1.8GHz "sweet spot". It seems the company
may be accelerating that move, as better than anticipated yields have
improved "bin splits" to higher speed grades. The net impact may be 1-2
million more P4 units in Q3 than the 3 million we had been forecasting (no
change to our estimates, however, because mobile units may be a little
lower). We are still expecting prices to dip slightly this quarter from the
$160 we estimated for Q2, but a stronger P4 ramp could lend support to our
forecast of a slight rise in prices in coming quarters. Higher prices will be
critical for margin recovery for the company.
Probably a mild seasonal build. It is still not clear whether the firming in
the processor market is just the result of inventory build or real demand.
With the Win XP build and the Christmas build upon us, we may not know until
late November whether a true pickup is in the offing. We are betting there is
at least a mild seasonal pickup developing.
Higher prices are key. While on the topic of pricing, we were able to spend
some time with Paul Otellini, head of the Intel Architecture Group, at IDF
last week. We believe one of the most important points he made in our wide-
ranging discussion was in regard to pricing. With the P4-2GHz selling for
$562, Intel's new top of the line desktop processor has once again been
introduced at the "mystical $600 price point". Though P4 prices were slashed
39% in August, the plan is to cut them by a less drastic 25% in October,
during the next scheduled round of cuts. The higher price points will allow
the company once again "to skim the cream off the top." Given that the
company has pulled away in the speed race with AMD (AMD-$14, 1S), it may be
able to raise prices. This is critical for a recovery of Intel's gross
margins.
Intel upgrading its mobile line. Talking with Intel people at IDF, we get the
sense that mobile processor demand could be coming in a little lower than we
anticipated. The reasons are probably two: 1) AMD is making a new push in the
processor market, and 2) The Japanese market, which is a large consumer of
mobile PCs, is slower. But mobile is still very much on Intel's mind. Under
the banner "More Speed but Less Power", Intel last week gave IDF attendees a
sneak preview of the upcoming mobile version of the P4, expected to ship
commercially in 1H '02. The mobile P4 demonstrated by the company was a
screamer, a 2GHz part built on a 0.18-micron process. The first mobile P4
Intel will introduce to the market will be a 1.5GHz part built on the
advanced 0.13-micron process. That product is currently being sampled at a
number of top PC OEMs, who are now receiving production quantities of the
PIII-M, which will eventually move into the low-end. In 1H '03, Intel will
start offering its next-generation processor with a brand new architecture
code-named "Banias" (named after a river in Israel, where much of the
development work is being done). This new mobile processor will have a host
of advanced power management features that will allow even longer battery
life over current systems.
Following the widely anticipated price cuts a weekend ago, the discount to
list on Intel processors on the gray market narrowed significantly to from
29% to 12%. The discount to list on P-III processors narrowed to 17% from
22%, partly as a result of the premium on the recently introduced 1.2GHz P-
III. AMD also cut list prices on its processors last Monday by as much as
almost 50%, but this had limited effect on the gray market prices as they
were already priced in and overall AMD processor prices fell only 1% on the
week.
DECLINE IN JULY SHIPMENTS SET ANOTHER RECORD
According the U.S. Semiconductor Industry Association (SIA), July worldwide
shipments of semiconductors continued to head into record negative territory
by declining 37%, compared to a June decline of 31%. The previous record, not
including June itself, was -26% in October 1985. All geographies fell
further, led by the Americas, which were down 51% yoy, compared to -45% in
June. Shipments in all other regions were down by roughly the same amount,
with Europe -34%, Asia-Pacific -30% and Japan -29%. Europe seemed to
decelerate fastest, declining 10% mom, compared to --6% for the group.
On a product segment basis, DRAM segment was once again the weakest,
declining 71%, compared to -63% in June. On a positive note, DRAM bit growth
seemed to accelerate for the first time in since May 2000, growing 41% yoy,
up from 25% growth in June (which was revised upward slightly from 18%). This
could be the beginning for a re-acceleration in demand for DRAM, which has
been growing well below its 10-year average 78% growth in recent months. We
believe large new-system memory upgrades with the shipment of Windows XP will
also help spur bit growth. Not surprisingly, price stable analog declined by
only 27% yoy, which does nonetheless represent a slowdown from --21% in June.
Other multi-market products, like discretes, declined by 34%, compared to --
29% in June. Microprocessors declined 32% yoy but down only 4% mom, less than
the 6% decline in June. The month over month decline between July and June
was less than the June over May decline in all geographic regions and in most
segments. Nothing else was extraordinary in the result.
We continue to believe the sector will begin setting a bottom in the August-
September timeframe, when not only the year-on-year comparisons reached a
growth peak in 2000, but also the dollar comparisons hit a peak. According to
the DOC data, orders hit a peak in July of last year. In line with our "Three
Bottoms or a Funeral (Ours)" call of last spring, we expect the semiconductor
stocks to gradually discount that peak going forward.
FIGURE 1. SIA SEMICONDUCTOR SHIPMENTS IN JULY (3 MONTH ROLLING AVERAGE)
Source: Semiconductor Industry Association and Salomon Smith Barney
DRAM LOWER; MARKET CONSOLIDATION SHOULD BE A PLUS
Overall action in the spot DRAM market has been pretty lackluster this week
with prices for 128Mbs SDRAM easing another 4.2% this week from $1.42 to
$1.36. Lower density 64Mbs were down by a smaller margin, closing the week at
$0.69 (-3.2%). Contracts drifted slightly lower as well to $1.45-1.50, down
about 4%. With spot market trading volumes getting lighter towards the end of
the week, many U.S. brokers were more interested in heading out early for the
Labor Day weekend. Their overseas counterparts were reporting a similar
story, though inventory at many brokers is quite lean, as most are unwilling
to hold too many parts for fear of getting stuck with higher cost goods.
The trade press last week was full of news of further consolidation in the
DRAM industry, which we take to be a plus. Toshiba (6502.JP-Y609, 3M) is
reported to be talking to Infineon (IFX-$24, 1H), Samsung (5930.KS-W196,500,
1H), and even Elpida (a DRAM joint venture of Hitachi/NEC) about either a
DRAM partnership or an outright sale of its DRAM operations. Meanwhile,
Winbond (2344.TW-NT$19, 2H), Toshiba's Taiwanese technology licensee, is
putting its $3.5 billion 300-mm plans on hold pending the outcome of its
partner's ongoing discussions. Consolidation should be a positive for the
industry as excess supply is soaked up which, in turn, could lead to firmer
prices.
WEAK PRICING TAKING A TOLL ON REVENUES AT SUPPLIERS
Virtually every broker we talk with about the Flash market reports continuing
soft unit demand. Buyers are still scarce while parts are plentiful with no
lead time. Prices, however managed to stay flat heading into the long
weekend, with 32Mbs at $6.50, 16Mbs at $3.32, 8Mbs at $4.63, 4Mbs at $1.75,
and 1Mbs at $1.63. Taiwanese Flash maker Macronix (2337.TW-NT$25, 2M) last
week indicated that 2H revenues would be almost flat to 1H instead of up 87%
(a pre-announcement that was in-line with the SSB forecast). Meanwhile, AMD
guided analysts to slightly lower Q3 revenues from down 10% to 15%
sequentially, to "down in the 15% range", mostly due to weaker Flash pricing.
---- |
