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Technology Stocks : Semiconductor Fundamentals

SMH 366.10

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Nov 3 4:00 PM EST

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To: cordob who started this subject	2/5/2003 10:15:44 AM
From: Robert Douglas	Read Replies (1) of 82

This comment on inventories came from Merrill Lynch this morning. Semiconductors Semiconductor Inventories (Comment Available) • Overall inventory levels as calculated by our quarterly supply chain analysis continue to decline. PC and handset inventories are at multi-year lows relative to cost of sales, and even wireline inventories have reached normalized levels. We don’t know when demand is going to recover, but our supply chain analysis suggests that any change in demand will be felt quickly by the semiconductor business. • PC Inventories: December quarter PC supply chain inventories declined to a seven-year low of 41 days, down from a revised 45 day figure for September. In dollar terms, inventory was flat sequentially at near seven-year lows. The decline was broad-based, with only PC distributors showing no improvement. • Wireless Inventories: Wireless OEM and EMS handset inventories declined during the Dec-02 quarter on both days and an absolute dollar basis. We note that the decline in inventory is typical during a seasonally strong 4Q. Days of inventory in the channel declined by 12 days sequentially and by 6 days YoY to a 5-year low of 42 days. • Wireline inventories: good news/bad news. The good news: reported inventories reached normal levels for the first time in three years. This is a significant milestone for the sector. The bad news: by adding written down inventories to the reported inventories, total inventories appear to be 40% above normal. It is impossible to quantify how long these excess inventories will sop up demand, but we believe that some of these will work their way back into the channel. • We expect growth from comm-IC vendors to outpace their customers in 2003, as OEMs finish working down inventories and return to the component market. That said, end market growth appears to be anemic for the OEMs. Our OEM equipment team is forecasting aggregate communications equipment sales to decline by 10% for 2003. Conversely, we are expecting aggregate revenues for our comm-IC universe to increase by 3% in 2003.

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