Semiconductors
The Semiconductor Beat
June 10, 2002 SUMMARY
* Though Intel's report affirmed in spades our outlook
Jonathan Joseph for a seasonally weak PC component market in Q2,
National's report--which in some ways represents a
broader view of the sector--supported our belief that the
Ramesh Misra broadline companies continue to see improving
fundamentals.
* Processor prices nudged down slightly last week, with
Dunham Winoto the discount to list on Intel processors widening from 4%
to 5%, and on P4's from 1% to 2%. AMD processor prices
slipped 2% last week.
* 128Mb DRAM moved up slightly to $2.08 (+2.7%), but
256Mbs were down to $5.23 (-10.7%) as that part continued
to close the parity gap. DDR was mixed; 128Mbs were flat
at $1.96 while 256Mbs were down to $5.14 (-6.6%). 128Mb
contracts fell 20% from $3.65 avg. to $2.70-3.10, as
expected.
* Flash remains spotty; 32Mbs and 4Mbs were flat at $8.19
and $1.05, but 64Mbs fell to $11.13 (-4.3%). 16Mbs inched
up to $4.97 (+0.4%).
OPINION: ANALOG SEMICONDUCTORS AN AREA OF RELATIVE STABILITY
A cartoon in a recent New Yorker Magazine: A young son has approached his
father, who sits in a plush chair, cigar in hand and glass of wine on a table
nearby. The son has clearly just asked his father what he does for a living.
Father puts his arm around his son, and explains: "Yes, I do make things,
son. I make things called deals."
Our call over the last four months, or so, has been that the personal
computer component market would likely look seasonally weak in Q2, while the
broadline semiconductors---including analog---would prove to be stronger. As
witnessed by Intel's report last week, PC components have been plenty weak.
Ironically, as demonstrated by National Semiconductor's (NSM-$31, 1H)
performance, the analog segment has actually been stronger than we would have
anticipated. The broadline area continues to show remarkable stability, and
the reports from the analog companies, as well as reports from our contacts
in the industry, suggest the pickup remains broad-based. We want to briefly
review the investment case for the analog semiconductor segment, which is
forecast to grow 3% this year and 25% next, compared to 3% and 23% for the
overall sector, respectively (ironically, only a day before the Intel (INTC-
$22, 1M) and National reports, the SIA revised upward its forecast for
microprocessors and downward its forecast for analog semiconductors. Go
figure).
Analog semiconductors are essentially the "translators" between the wave-form
world of man (light, heat, pressure, and sound all move in waves) and the
digital world ("ones" and "zeros") of computers. Among other functions,
standard analog semiconductors act as amplifiers in strengthening a weak
signal, as converters to turn a signal from wave-form to digital and back
again, and as voltage regulators, stepping down a signal from higher to lower
power. Traditionally, the European and U.S. semiconductor companies have
dominated the high-performance end of the semiconductor market, especially
the amplifier, converter, and power management functions. Though not always
dependable, Dataquest shows that sales of the top-ten analog makers last year
declined by about 24% last year compared to a 32% decline for the overall
semiconductor industry, with ST Micro (STM-$24, 1H) taking the lead from
Texas Instruments (TXN-$26, 1M). ST Micro is a big supplier of power
management circuits into the cellular phone market (TI mostly supplies
logic), which was a relative out-performer. Meanwhile, the broadband
communications and personal computer markets, which impacted TI, Analog
Devices (ADI-$34, 1H), and National to a greater extent, were themselves hit
harder. Below are several positive points for investors regarding the analog
sector:
1) Diverse product lines and more stable pricing. Unlike a company like
Intel, power analog and discrete suppliers tend to manufacture and sell
thousands of standard analog products. Given the vast number of products, no
single competitor provides a duplicate product line, which makes it harder
for customers to comparison shop. Unlike in the DRAM market, there is very
little "pin compatibility" in the analog market, which allows for generally
more stable pricing. In the last year, analog prices have fallen by 14%,
while overall semiconductor prices have fallen 19% and memory has fallen 59%.
2) High return on assets with long-life cycles. Unlike products in the fast-
moving microprocessor or communications IC markets, many analog products
continue to generate revenue and profits for years after introduction.
Typical market life cycles for standard analog products can run greater than
20 years. In addition, standard analog generally uses trailing-edge process
technology, which promotes a high return on invested capital. Over the last
10 years, average return on assets (ROA) for the leading analog semiconductor
companies (STM, TXN, ADI, NSM, MXIM, and LLTC) has been 16.9%, compared to
11.9% for the semiconductor sector (S&P Semiconductor Companies; Equally
Weighted) as a whole.
3) Diverse customer base. While a microprocessor maker may have a dozen, or
so, most important clients, analog companies typically have no customers that
represent more than 5% of revenues, and some companies have up to 10,000
customers. This presents greater diversification in end-markets, allowing for
greater stability in the highly volatile semiconductor market. For this
reason, in many ways the National report was a better read on the fortunes of
the semiconductor industry as a whole than was the Intel report.
TOP 10 ANALOG SEMICONDUCTOR MANUFACTURERS, 2000 AND 2001
Company 2000 Analog 2001 Analog Change (%)
Revenue Revenue
ST Microelectronics 3.74 billion 3.21 billion -14.1
Texas Instruments 4.10 billion 2.95 billion -28.1
Philips 2.12 billion 1.57 billion -26.1
Analog Devices 2.13 billion 1.56 billion -26.8
Infineon Technologies 1.92 billion 1.55 billion -19.5
National Semi 1.81 billion 1.19 billion -34.1
Maxim 1.05 billion 1.09 billion 3.7
Motorola 1.25 billion 0.89 billion -29.1
Sanyo 1.18 billion 0.85 billion -28.0
Toshiba 1.25 billion 0.81 billion -35.4
Total 20.55 billion 15.67 billion -23.8
Source: Gartner Dataquest
PROCESSOR MARKETS RELATIVELY FLAT
Though there was no news last week of a stunning pickup in mobo sales out of
the Computex Trade Show in Taiwan, attendance was said to be nearly double
last year. Coupled with a slew of new product offerings, most personal
computer makers are talking about some improvement in June over May, and a
further pickup in Q3 on a seasonal basis. Chipset manufacturers showed off
their chipsets that support AMD's (AMD-$10, 2S) upcoming Hammer family of
processors, including Acer Labs (2353.TW-NT40, 3M), Nvidia (NVDA-$32, NR),
Via (2388.TW-NT$90, 1H) and SiS, in addition to AMD itself. The press on the
Hammer family out of the conference, however, was mixed, with some reports of
bugs and others that the company was going to accelerate it introduction.
Also last week, Asus introduced a PDA based on Intel's new XScale processor.
XScale is the successor to the StrongArm family of processors that Intel
inherited from Digital Equipment, and is targeted at PDAs and eventually 3G
mobile phones. AMD is expected to launch its first processor built on the
0.13 micron process (codenamed Thoroughbred) on Monday (today), the Athlon
XP2200, which will run at a clock speed of about 1.8GHz. While it is not
clear when this processor will start shipping in production volumes,
beginning production on the 0.13-micron process is an important step for AMD
to get back in the GHz clock speed race.
Intel processor prices slipped only slightly last week, with the overall
discount to list widening from 4% to 5%, while on P4s it widened by a point
to 1%. In-line with Intel's suggestion on its mid-quarter update that product
mix was weak, the discount to list on the recently introduced 2.53GHz P4 was
17%---which makes it one of the more discounted P4s on the market. The 1.9GHz
P4, in contrast, is trading at a 22% premium to the list price.
Over the last ten years the average increase in microprocessor unit sales in
the second half over first half has been 9.7%, and we therefore believe that
Intel's expectation of strength in the second half is a reasonable one. Our
own growth estimate for Intel processors unit sales in 2H'02 over 1H is 7.4%.
DRAM PRICES MIXED; CONTRACTS HEADED LOWER
The DRAM market was mixed last week with 128Mbs up slightly to $2.08 (+2.7%)
from $2.03, while 256Mbs were down from $5.85 to $5.23 (-10.7%) as that part
continued to nudge closer towards parity with 128Mbs. DDR products were also
mixed with 128Mbs virtually unchanged at $1.96, while 256Mbs were down to
$5.14 (-$0.36, -6.6%). Our broker contacts told us that most buyers were
being "opportunistic", rather than buying in large volumes. The market was
quiet all week, and trading volumes were reported to be fairly thin as most
players were focused on Computex, which ended last Friday. Brokers were
initially hoping that trade show would spark some buying activity, though so
far incoming order levels appear to be rather tepid. Regionally spot prices
were weaker in Taiwan, with Hong Kong and Singapore relatively stronger,
which could be a reflection of the slow demand out of China last week.
As expected, tier-one DRAM suppliers lowered 128Mb contracts last week by
about 20% from $3.45-3.85 (avg.: $3.65) to $2.70-3.10 (avg.: $2.90). We had
expected prices to fall to about $3.00. We note that in recent weeks several
major fabs, in an effort to jump-start demand, have reportedly pushed through
"special deals" in the channel at $3.20-3.30, lower than the official prices
at the time. Meanwhile tier-two DRAM markers are quoting about $2.30-2.50 for
their own customers. Dell Computer (DELL-$26, 3H) and Nanya reported Monday a
5-year, $3 billion deal. Dell is clearly trying to support a new player to
break up any pricing cartel that might be developing. These kinds of deals
are usually as much publicity as they are substance, and tend to steer away
from pricing agreements.
FLASH STILL STUCK IN THE MIDST OF CROSS CURRENTS
According to brokers the flash spot market remains pretty spotty. Prices for
32Mb, 4Mb, and 1Mb parts were flat on the week at $8.19, $1.05, and $0.90,
respectively. High-end 64Mbs fell from $11.63 to $11.13 (-4.3%). Others like
16Mbs and 8Mbs inched up to $4.97 (+$0.02, +0.4%) and $2.76 (+$0.02, +0.6%).
The data points coming from wireless handset, the biggest end market for
flash, are somewhat mixed. On its analyst conference call National Semi (NSM-
$31, 1H) spoke of solid conditions in that segment, probably driven by the
company's share gains at the faster growing handset manufacturers. But
another component supplier, RF Micro (RFMD-$10, 3S), preannounced lower
earnings on Friday because of order push-outs at some customers (Nokia-NOK-
$12, 3M is its largest customer), which suggests that at least some of the
shortfall may be related to customer mix issues. |
