John
maybe the following article explains it somewhat.
Regards
-Albert
04:16am EDT 25-Sep-01 J.P. Morgan (Eric Chen, Ph.D.) INTC ASTSF TSM INTC.N
1 of 2 Intel announces foray into design and manufacturing services
**** JP Morgan/JP Morgan H&Q **** JP Morgan/JP Morgan H&Q ****
Company: Intel Corporation
Price: 21.31
Recommendation: Long Term Buy
Notes: a, f
Analyst: Eric Chen, Ph.D. 415-439-3210
Date: 9/24/01
1 of 2 Intel announces foray into design and manufacturing services
* Intel announced yesterday the formal launch of its fabless ASIC outsourcing
business, Intel Microelectronics. Acting as a "one-stop shop" for chip
designers, the new business offers management of the chip making process, from
initial design to final product and distribution, if desired.
* Intel will focus primarily on the communication markets, targeting chip
designers in broadband, local-area networking, wide-area networking and
wireless. We believe the focus on communications may be an attempt at jump-
starting its own emerging communications business.
* Judging from the experience of other major semiconductor companies
attempting to enter the service arena, it is our opinion that there is no
guarantee for success even for a company with Intel's resources. We believe
that there are fundamental business model differences that prevent
semiconductor device companies from having immediate success in trying to
migrate to the service model. We remain skeptical.
* Due to its relatively nascent nature, meaningful revenues from the business
are not expected for some time. As such our estimates remain unchanged.
Maintain Long Term Buy.
2000 A 2001 E 2002 E
Q1 EPS $0.35 $0.16 $0.15
Q2 EPS 0.50 0.12 0.17
Q3 EPS 0.41 0.11 0.19
Q4 EPS 0.38 0.14 0.21
FY EPS 1.65 0.53 0.71
FY REVS (M) 33,726 26,411 28,825
CY EPS 1.65 0.53 0.71
CY P/E 12.9 40.2 30.0
FY Ends Dec Current Price $21.31
52-Week Range $19-50 Market Cap (B) $146.8
Shares Out (M) 6,889 Book Value $5.33
Net Cash/Share $1.53 3-Year EPS Growth NM
CY02 P/S 5.09
Stock view. We do not necessarily believe that the current announcement
surrounding the company''s formal entry into the fabless ASIC services
business will have significant near-term impact. The fabless ASIC model is at
this time still unproven, but we find Intel''s foray into the business
interesting. If successful, the company may generate upwards of $100 million
or more, looking out a couple of years. Since there will be minimal near-term
impact to the financial model, we are not making changes to our estimates or
rating. Maintain Long Term Buy.
Intel Microelectronics. According to press and company reports, Intel is
intending to provide a turnkey, "one-stop shop" for chip designers, primarily
in the communications ASIC/ASSP markets, to bring new products to market in a
quicker, more cost effective manner. Intel will effectively be providing a
full chip design and production solution that will include IC design,
production management, test and packaging, logistics and even distribution, if
desired.
To provide a seamless, more time and cost effective solution, the company has
forged numerous relationships with key EDA, foundry and test vendors including
Synopsys, Chartered Semiconductor, TSMC, UMC, Amkor, ASE Test and ChipPac.
Instead of a customer having to deal individually with each entity along the
chain, they can choose to work directly with one - Intel.
A potential boost to its communications business. Intel will be
targeting the communications markets with its new fabless ASIC model.
Specific designs that may likely initially utilize such services include
broadband, local-area networking, wide-area networking and wireless, to name a
few. By targeting ASIC and ASSP designs, we believe Intel is likely
attempting to "kick-start" its own communications business. The opportunity
for Intel, beyond charging for management services, lies in the potential sale
of its own communications products, such as network processors, to the fabless
ASIC/ASSP customers who demand such solutions. We believe that Intel currently
has one customer, Transwitch, in its nascent service business.
Fabless ASIC services - a good idea for Intel? It is interesting to see
a company known for its success in PC processors and other devices making a
run at an outsourcing services business, specifically for communications
applications. Questions that we ask include: Will the expertise in PC
computing processors be easily transferable to outsourcing services? Will the
ever-present potential of being "Wintel''d" create demand issues? Will a
service-oriented business, with potentially high infrastructure costs deliver
acceptable margins? Will entry into the outsourcing business yield growth for
its own communications business? These items, among others, are unclear at
the present time, but we will be following closely to see potential development.
We are skeptical. For the most part, we are skeptical that Intel will
have immediate success in its foray into the services arena. Other large
semiconductor companies, including IBM (IBM, $94.80, Buy) and Hynix have both
tried to enter the manufacturing service business. IBM has met with limited
success, but mostly attributable to its niche technologies such as copper,
SiGe, SOI, etc. Even until today, we still do not believe that IBM is known
for great services. Hynix, on the other hand, has pretty much failed in its
foundry effort and thus remained predominantly a DRAM company. We believe
that there are fundamental business model differences between a device company
such as Intel and a manufacturing service company such as TSMC (TSM, $10.27,
Buy) or ASE Test (ASTSF, $7.07, Buy). First, the service orientation that is
required for a foundry company is not necessarily a natural attribute of a
device company. Second, the manufacturing paradigm itself is dramatically
different between a device and foundry company. For instance, foundries have
to deal with a multitude of products each with limited volume that requires
varying technologies, which is just the opposite of what a device company
typically does in its own fabs. Third, the pricing model is different. We
learned from our industry contacts that, allegedly, pricing wafers in the
foundry business is quite an art. In short, there is no guarantee that, even
with its vast technology, manufacturing and financial resources and know-how,
Intel will have smooth sailing to success in its foray into the service arena. |
