Semiconductors . . . Morgan Stanley downgraded its view on the European semiconductor industry to cautious from in-line. "Findings from a recent trip to Asia confirm our belief that in the first half of 2003 utilization rates will remain depressed; pricing pressure will continue; equipment spending budgets will remain conservative and earnings risk may rise," the broker said. It left ratings unchanged for large cap stocks STMicro, Infineon and ASML.
Merrill Lynch cut its rating on Micron Technology to neutral from buy, telling clients "although we continue to believe that the DRAM pricing recovery that began in August of 2001 is intact, our confidence in Micron's ability to capture the benefits of that upturn has been shaken." Micron's quarterly sales missed most expectations late Tuesday.
Credit Suisse First Boston touched on concerns Micron may have to raise cash next year, telling clients overnight "our revised model suggests that Micron will be cash flow negative over the foreseeable future, with MU's cash balance dipping into negative territory in Feb 2004. We maintain our view that MU will have to raise cash in the first half of calendar 2003."
JP Morgan expected Microchip to raise its revenue guidance at tonight's update to the high-end of its forecast of $173.0-$178.0 million due to strong demand for its microcontroller and analog products. The firm reiterated Overweight rating, but sees stock as expensive and would be more constructive on the shares closer to $17.
UBS Warburg cuts their price target on Broadcom to $20 from $25 owing to the mounting seasonal uncertainties facing the semiconductor industry and the potential impact to relative valuation levels.
ATI Technologies reported fiscal first quarter revenue that exceeded expectations but earnings that fell shy as gross margins declined, and warned that second quarter earnings would be sequentially flat. Adjusted net income for the quarter ending November, which excludes non-recurring items, was $7 million, or 3 cents a share, versus 4 cents a share in the year-earlier period. Revenue rose 34.5 percent to $322 million. Analysts had been expecting earnings of 4 cents a share and revenue of $264.7 million. Gross margins fell 2.8 percentage points to 27.3 percent. For the February quarter, the maker of 3D graphics added the revenue would decline sequentially by 10 percent.
UBS Warburg initiated Marvell with a Reduce rating and $17 price target; cautious bias is principally based on the potential for Gigabit Ethernet disruption from Broadcom and Intel in a fiercely competitive market, and checks indicate pricing wars have heated up in the relatively new Gigabit Ethernet product cycle. Also, firm believes that MRVL's impressive gains in the HDD segment are largely behind the company, and valuation is at an unwarranted premium to peers at 9x sales.
Micron Technology reported revenues of $685 million, down 8% Quarter over Quarter, and EPS of -$0.52 after the close, which was significantly short of consensus revenue expectation of $809 million and EPS of -$0.23. Analysts had been even more optimistic about Micron’s DDR transition and non-DRAM diversification efforts and were thus modeling 1st quarter revenues of $951 million and EPS of -$0.07 going into the call. Micron reported cost of goods sold of $722.4 million, which includes an additional $91 million in inventory reserves for SRAM and flash products as well as for older SDRAM and DDR parts. To arrive at the company’s organic cost, analysts reduced costs of goods sold by the $91 million and then added back the $139 million in benefits received during the quarter from reserves taken in prior quarters. Organic costs of goods sold were thus $770 million or $5.43 per 256Mb equivalent. While revenues missed analysts target, organic costs did fall 11% Quarter over Quarter from $6.07 per 256Mb in 4th quarter, in line with expectations. Estimate $192 million in net reserves still remain, half of which will likely be applied in 2nd quarter.
DDR revenue mix for the company came in at only 40% of revenues, which is less than what we had anticipated. The company confirmed continued strength in DDR orders, but ceded that it could not increase production fast enough to meet demand. Synchronous DRAM represented the other 60% of sales and given the huge pricing discrepancy, it was no surprise that revenues and margins fell Quarter over Quarter. Average DDR pricing for the quarter was above $7 per 256Mb, while average SDRAM pricing was approximately $3 per 256Mb. While DDR pricing had a tremendous rally during the quarter, we note SDRAM ASPs suffered a 45% Quarter over Quarter decline. As a result ASPs in the quarter were down 12% Quarter over Quarter to $4.64 (per 256Mb), and units were up 4% Quarter over Quarter to 142 million 256Mb equivalents.
Micron’s November quarter revenues of $685 million translate to 18% market share if one estimates the November industry’s DRAM billings from monthly SIA data. The company lost market share in 1st quarter 2003, although during the call management only alluded to market share losses in 2002 (versus 2001). For the company to sustain 21% market share in 1st quarter for example, worldwide DRAM billings would have to fall an unprecedented 50% Month over Month in November 2002, with September 2002 and October 2002 worldwide billings reported at $1.3 billion a piece. Some indications that Micron had encountered DDR mask issues during the quarter, but did not realize it would have such a dramatic impact. DDR production increased to 50% of total output in 1st quarter from 40% in the August quarter, but came in below 60% expectation. Micron’s need to write down a material portion of non-DRAM revenues also indicates that the company’s diversification strategy is not progressing as well as planned.
Micron did manage to reduce SDRAM inventory during the quarter to the 2-3 week range, which is fairly lean. SDRAM pricing will continue to improve in the current quarter, as inventory levels across the industry return to normalized levels. In fact, SDRAM ASPs have improved 11% Week over Week after 5% Week over Week gains during the first two weeks of December. Overall inventory level fell slightly Quarter over Quarter in bit terms in 1st quarter , and decreased by $19 million excluding the impact of inventory reserves. Reported inventory increased by $29 million however, but this reflects the reduction of reserves by $48 million during the quarter (-19 minus -48 = 29).
While Micron’s debt to equity ratio remains healthy at 6.8%, the revised estimates indicate the company will be free cash flow negative by $552 million in 2003. Given cash and liquid investment of $658 million, the company could need to raise additional capital if it wants to stay on course for capital spending of $1 billion in 2003, even taking into account an additional $215 million in LT securities. Increased payables and declining receivables during the quarter point to aggressive efforts to keep cash on the balance sheet.
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