Chip firms zero in on job cuts, again
By Chris Kraeuter, CBS.MarketWatch.com
Last Update: 2:25 AM ET Oct. 12, 2002
SAN FRANCISCO (CBS.MW) -- With the prospects for an industry turnaround slipping ever further away, manufacturers of semiconductors and chip-making equipment appear likely to announce more layoffs and other cost cuts as early as this week.
Chip sector firms face mounting pressure to decide whether they'll muddle through another six months with excess manufacturing capacity or cut jobs. And for many of the largest names in the business -- including Applied Materials (AMAT: news, chart, profile), Novellus Systems (NVLS: news, chart, profile) and Advanced Micro Devices (AMD: news, chart, profile) -- the answer is job cuts, analysts say.
"These companies were sized for one of the greatest bubbles that we had ever seen and it takes awhile to resize for more normal times." said Cristina Osmena, a chip-equipment analyst at Needham & Co.
Indeed, over the past two years, restructurings and layoffs have pockmarked the entire technology sector, which has shed an estimated 20 percent of its jobs in the current downturn.
However, in recent months the rate of layoffs has slowed down as some executives grew more convinced that demand in the computer and electronics industries was on the rebound.
That perceived rebound hasn't happened, though, and the all-important holiday shopping season, which represents the strongest period of demand for semiconductor-heavy electronics products, is shaping up to be lackluster.
Closing the gap
Some cutbacks already are in progress. Applied Materials, a bellwether company for the tech sector, has been quietly cutting staff for more than a month, according to Osmena.
Mark FitzGerald, a Banc of America Securities chip-equipment analyst, also said Applied Materials has fired employees to save money, estimating the figure at less than 8 percent of its work force during the last two months. A larger chunk of layoffs, he said, is possible in January, "predicated on what type of year they expect to have in 2003."
Applied Materials, based in Santa Clara, Calif., did not return calls seeking comment but the company has previously acknowledged shrinking its staff roster to 16,000 from 22,500, or 30 percent, while revenue has declined 50 percent from a peak in late 2000.
Analyst Timothy Arcuri of Deutsche Bank said in a recent research note that Applied Materials is poised for a significant new round of layoffs, "likely forthcoming before year-end."
Novellus Systems, another major maker of semiconductor capital equipment, is expected to announce staff cuts of 10 percent as early as Tuesday, when it is scheduled to report third-quarter results, according to Banc of America's FitzGerald.
Novellus, which has seen its revenue plunge about 50 percent since the start of 2001, has reduced its staff by about 11 percent this year.
A spokesman for Novellus declined to comment. However, during a presentation at an investment conference in late September, CEO Rick Hill said Novellus is focused on lowering its costs and that he remains in a "cautious mode" regarding hiring.
Last week, after Advanced Micro Devices announced it expects to fall short of third-quarter revenue estimates by 17 percent, several analysts said that would likely lead to job cuts and another restructuring.
AMD, the No. 2 seller of chips for personal computers, recently completed a restructuring that was intended to save $120 million a year. The company's staff has declined 7 percent to 13,730 even as revenue has dropped about 50 percent.
AMD is expected to post third quarter results on Wednesday. A spokesman declined to comment before that report comes out.
Intel (INTC: news, chart, profile), AMD's much larger rival, announced in August that it intended to cut 4,000 workers, or 5 percent of its staff, from its payroll by the end of the year.
Looking at Intel's financials, quarterly revenue is down 27 percent from its peak in late 2000 while overall operating expenses are off only 7.2 percent, mainly due to hefty research and development spending.
"It's my opinion that Intel has been a little slow to make cuts," said semiconductor analyst Tom Smith with Standard & Poor's.
Smith expects staff reductions throughout the industry, especially as the timeframe for a sales rebound continues to be pushed out.
"For most companies, revenues are moving up -- but more slowly than expected," said Smith. "And to the extent that they didn't take costs all the way down, a slower recovery is not bringing revenue up fast enough to close the gap."
Post-bubble landscape
Ashok Kumar, semiconductor analyst with U.S. Bancorp Piper Jaffray, doesn't see signs of a turnaround. "This is the post-bubble reality," he said. "There was hope for an imminent recovery and as it has been pushed out companies are realigning cost structures with the post-bubble landscape."
Other chip and equipment makers that have announced staff cuts since the beginning of September include Varian, Axcelis, MKS Instruments, Ultratech Stepper, Micrel, ARM Holdings, Advanced Energy, Credence, Anadigics, Atmel, and TranSwitch.
These cuts, and others recently announced or pending, come well after many industry players thought they had trimmed staff enough and that a rebound appeared imminent.
Analyst Hans Mosesmann at Prudential said a poor second half, coupled with the traditionally weak first half, translates into three or four quarters of additional weakness.
"The recovery time for the industry is being pushed out, and companies have to do what's best for their shareholders," Mosesmann said.
Eric Ross, semiconductor analyst with Investec, said some chipmakers are resorting to offering employees voluntary separation offers as a not-so-public way to shrink staff. Unlike large layoffs, these so-called buyout offers don't require a public company to disclose the decision to investors. "It ends up costing the same anyway," Ross said.
For chipmakers serving the communications industry, any recovery is considered on hold until 2004, making it even more likely that there will be further layoffs at companies that have already seen deep cuts.
At Applied Micro Circuits (AMCC: news, chart, profile), CEO David Rickey said he may be forced to make more cuts. "I would say my timetable is months not years in terms of the company will either be a lot smaller, or we will see a revenue rebound, or we will acquire revenue and then there will be significant cost cutting."
Bill Ruehle, chief financial officer of Broadcom (BRCM: news, chart, profile), recently said at an investment conference that his company will do whatever it takes to survive.
"We're investing for the long-term obviously and you can always make draconian cuts immediately to help your short term," Ruehle said. "But if that's going to hurt you in the long term, then that's not what you want to do. On the other hand, you have to recognize reality and what the growth rates are going to be and take the steps you need to take."
Chris Kraeuter is a reporter for CBS.MarketWatch.com in San Francisco
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