CSFB's outlook after April SIA data
Semiconductors - April SIA: A Little Weak
• April Data. Off of April SIA data (lagging indicator) released Friday, we remain cautious on semiconductor fundamentals given the current state of the cycle (mid-cycle dynamics), valuation (early cycle valuations), and environment (over-capacity, over-competition). April was materially less than seasonal overall and suggests we need to see better than seasonal growth in May and June to achieve aggregate June quarter expectations for slightly less than seasonal.
• 1st Leg Rolling Over. Worldwide semiconductor revenue was flat sequentially (0.0%) on a 3-month moving average basis (3MMA) and decreased 25.1% on a single-month basis in April (below the 25-year historical average of –17.5%). The 3MMA Y/Y growth rate peaked in December at +23.1%, then decelerated to 22.1%, 17.9%, 13.1%, and 9.7% between January
and April as the cyclical recovery loses steam. Unit growth (3MMA) has also continued to decelerate on a Y/Y basis, from 26.9% (Sept ’02) to 7.3% in April. From a high-level perspective, we have seen a clear peak in unit growth and continued deceleration. The milliondollar question remains whether there is a “looming” second leg of growth strong enough to support forward forecasts. So far, end-demand forecasts tell us the answer is no.
• Analog: Standard analog pricing and data converters were the weak spots in the April data. April units, revenue and ASPs for all analog segments (except Comparators ASPs) posted absolute m/m decline. In total, analog units, revenue and ASPs were down 16.1%, 23.3% and 8.6% on an absolute month-over-month basis.
• DRAM: Not surprisingly, DRAM revenue declined 5.1% M/M in April on a 3MMA basis, due primarily to ASPs, which declined 5.9%, partly offset by unit growth of 0.9%. However, with the SARS situation possibly improving in China and the launch of Springdale on May 21 (supports DDR400 and dual channel), we expect a slight firming in DRAM sport pricing.
• MPU: MPU revenue decreased 1.3% in April on a 3MMA basis, as a 0.4% increase in ASPs was more than offset by a 1.6% decline in units. This revenue decrease is below historical seasonality of a 1.6% growth in April over the past 17 years (3MMA). Below seasonal Q1 MPU growth in the context of PC semi vendors’ expectation of outgrowing end-markets for the rest of 2003 is concerning, although macro factors may be partly to blame.
Executive Summary - Semiconductor Industry Outlook:
First Leg Rolling Over; Is There a Second Leg Coming?
Our overall thesis on the sector fundamentals remains intact, as we believe the combination of (1) decreasing hardware barriers, (2) structural semi overcapacity, (3) well-funded semi balance sheets, and (4) weak end-market unit growth rates are likely to continue to result in a weak profit outlook. In addition, the current position in the cycle (mid-cycle dynamics) combined with current valuations (early cycle valuations) suggests we need to see a strong second leg of unit growth to support recent stock moves.
June Q Less than Seasonal So Far. On the April conference calls, semiconductor companies suggested (1) March’s better than seasonal strength continued into April, and (2) the June quarter was looking slightly less than seasonal (our
universe is expecting 2.7% q/q growth, vs. its seasonality of 5.2%). However, the SIA data suggests that April was both worse than expected and materially worse than seasonal. From a high-level we would point out that if this is the early stage of a cycle and not mid-to-late, one would expect better than seasonal growth.
Seasonal May and June Not Enough. Doing the math, if we see seasonal May and June data (absolute revenue up 2.6% and 18.6% m/m), the June quarter will come in down 3.6% (vs. seasonal of up 2.3%). In order to achieve a seasonal June quarter, we need to see 10% and 22% m/m growth in the absolute May and June data, respectively. While checks and news flow suggests demand has remained firm in general, we do not believe demand has proved significantly better than seasonal in May.
Clear Peak. Second Leg? While we are the first to admit that history tells us we could have a second leg to this cycle, it is clear from the data that we have seen a near-term roll-over in the growth for the first leg of this recovery (which is now on record for 16 months post-trough and 10 consecutive months of y/y growth).
Units Rolling Over as Well. We continue to focus on units, rather than just revenues, as the key barometer for the semiconductor cycle. Unit growth (3MMA) has also continued to decelerate on a Y/Y basis, from 26.9% (Sept ’02) to 7.3% in April. This highlights our thesis that the overcapacity combined with the well-funded semiconductor balance sheets is weighing on profitability, especially for those companies with weak barriers.
Valuation and April Data Suggest Caution. Given semiconductor stocks have outperformed year-to-date and are trading at above average multiples (roughly 64x CY04 EPS and 3.5x EV/2004 Revenue), embedded expectations for growth
and leverage are concerning at current valuations. |
