SSB thinks that Intel will release "Yamhill" plans within
couple of weeks. Is Intel giving up on ia64?
08:29am EST 11-Feb-02 Salomon Smith Barney (Jonathan Joseph +1-415-951-1887) IR
The Semiconductor Beat
SALOMON SMITH BARNEY Industry Note
Semiconductors
The Semiconductor Beat
February 11, 2002 SUMMARY
* Investors are taking some solace in the relatively
Jonathan Joseph simple balance sheets and revenue statements of most
+1-415-951-1887 semiconductor companies. These companies are largely
jonathan.joseph@ssmb.com run by electrical, rather than financial engineers.
Dunham Winoto * Intel processor prices were unchanged last week,
+1-415-951-1875 with the discount to list flat at 13%; the P4
discount/list widened 2 pts to 6%, largely due to a
Ramesh Misra price drop on the 2.2GHz P4 as 0.13 micron
+1-415-951-1883 production at Intel ramps up, improving availability
of the Northwoods. AMD prices slipped a percent over
the week.
* DRAM was hot again last week as 128Mbs went up 6%
to $3.49; 256Mbs and 64Mbs were up 9% to $7.39 and
$1.76, respectively, and DDR 128Mbs up 5% to $3.89
and 256Mbs up 6% to $7.67. 128Mb contract prices
will go up again this week, from about $3.75 to
$4.00-4.50, with spot closing the gap.
* Most low-end Flash including 8Mbs were flat at
$2.78. High-end 64Mbs were marginally up to $10.60
(+1.0%) but 32Mbs downticked to $8.31 (-0.7%)
OPINION: SEMIS HAVE ELECTRICAL, RATHER THAN FINANCIAL ENGINEERS
"You are never given a dream without being given the power to make it come
true."
Richard Bach, quoted at the opening ceremonies for the Salt Lake City Winter
Olympics. Quoting the author of Jonathan Livingston Seagull opens up a whole
new genre of 1970s quotes for this page from authors as diverse as Alfred E.
Neuman, Henry Gibson, and Snoopy.
Over the last 15 years, the number of Chapter 11 filings in the semiconductor
sector cannot even fill up one hand. Not that many have not had a tough time.
Companies like Xicor (XICO-$8, NR), Microsemi (MSCC-$17, NR), International
Rectifier# (IRF-$39, 2H), Micron Technology (MU-$35, 1S), and others have had
their tough times. But their clean balance sheets have allowed them to survive
downturns for even bigger recoveries. Rather than the New New Economy, call
this the Old New Economy.
1) Lite on the debt. Debt levels in the semiconductor sector are low by most
standards---on average debt/equity is about 20% (with a range of 1%-46%) at
large-cap semi companies --and almost all of that is convertible, rather
than straight debt. Semiconductor companies did not take on loads of debt
because of some brilliant strategy, but because they know no one---including
the high yield markets---would lend to them due to their volatility of
earnings and cash flow. As a result, they have had to largely depend on
internally generated cash flows and opportunistic equity financing to run
their cash machines.
2) Simple balance sheets; acquisitions for technology. Semiconductor balance
sheets are pretty simple, with a relatively small amount of intangibles,
mostly an artifact of high-priced acquisitions made over the last couple of
years. Those acquisitions, however, have been to capture technology, rather
than boost revenues. Last year's FASB 141 (Business Combinations), and 142
(Goodwill and Other Intangible Assets) will likely reduce the amount of
amortization because it recognizes that some of the acquired know-how has an
indefinite, rather than finite life. For semiconductors, at least, it is
pretty easy to see where the cash is going, with normal business practices
like channel stuffing relatively apparent.
3) Electrical, not financial engineers. We have to think culture has played
some of the part in keeping most engineering in the semiconductor sector of
the electrical, rather than financial kind. Most of the top executives of
the major companies we follow---Intel, Texas Instruments (TXN-$30, 1M),
Analog Devices (ADI-$39, 1H), Advanced Micro, National Semi (NSM-$26, 1H)---
have engineering backgrounds, as are most of their chief operating officers.
While not "simple", they are also not that fancy.
4) Lots of chances to throw in the kitchen sink. Most of our companies suffer
sharp setbacks to revenues in earnings every 3-4 years. Though they may seek
to "smooth earnings", as do all companies, there are occasional
opportunities to throw in the towel and wipe out whatever questionable
assets and valuations may have collected over a period of time.
That is not to say earnings have never been overstated in the semiconductor
sector. Probably the most notable was the used of capital gains from venture
company sales, which were clearly reported in the non-operating income line.
Intel was the primary beneficiary of these sales, followed by Texas
Instruments. These investments collapsed about a year ago, and have been
largely written down.
MICRO PRICES LITTLE CHANGED; AVAILABILITY IMPROVES AT THE HIGH-END; LOW-END
TIGHT
At last week's International Solid State Circuits Conference (ISSCC) in San
Francisco, Intel (INTC-$33, 1M) talked quite a bit about its second generation
64-bit microprocessor, McKinley, which follows the Merced, which was launched
early last year. McKinley is expected to go into production by the middle of
this year, and for some time has been widely considered to be Intel's "real"
processor offering for the high-end server segment, with Merced a kind of
place-holder for early review of the company's 64-bit strategy. While server
processor volumes pale in comparison to Intel's desktop or notebook processors,
it is a high margin segment, and will offer Intel a platform to test and
demonstrate features and design methodologies that will eventually make their
way to the desktop processors. Do not look for the Itanium to hit the desktop
any time soon, however. In about two weeks, we may hear more about "Yamhill" at
Intel's Developer Forum. Like AMD's (AMD-$15, 1S) 32-bit internal/64-bit
external processor, Sledgehammer (which is targeted at the desktop), it will
probably take the P4 into the next generation of desktops.
Availability of P4 processors, while significantly better than in the
November/December timeframe, remains an issue in some part types, especially
for the low-end P4s. This trend is reflected also in the relative stability of
prices of the 1.3, 1.4 and 1.5GHz P4s. Since November, prices on these
processors have generally been flat to up. Last week, the discount to list on
Intel processors remained flat at 13%. We believe Intel's 0.13-micron
transition and production ramp is progressing very smoothly (in contrast to the
issues some other manufacturers are facing, and consequently there is improving
supply of the Northwood). This may have contributed to the 7% price decline of
the 2.2GHz P4 last week, which widened the discount/list on P4s by 2 percentage
points to 6%. AMD processor prices were fairly stable, down 1% over the week.
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