Semiconductor Equipment . . . Agilent announced a large 25 system 93K SOC Test order with the ASE Group. Believe A Semi Test bookings, modeled down Quarter/Quarter after a big surge in 2nd quarter (April) may in fact have a good chance of posting a gain Quarter/Quarter, despite normal slightly softer seasonality. Estimates are subcon utilization is high and demand visibility improving. Competitor Teradyne posted strong ST (and SOC) bookings offering positive commentary on 2nd half visibility. Analysts think 2nd half "swoon" for Agilent is less of a risk this year with broadening improvement in demand for Semi Test, key wireless SPG segments, and stabilizing T&M trends.
Semiconductors . . . Cypress Semiconductor earned pro forma $3.4 million, or 3 cents a share. That matched the consensus of analysts. Revenue rose 12 percent to $203 million from $181 million in the prior quarter, although it was basically flat with the year-earlier period.
DSP Group will report 2nd quarter on July 21st. See potential for upside to consensus 2nd quarter of $0.21 based on strength in 2.4GHz and shipments of new 5.8GHz products. Retail checks indicate new Panasonic 5.8GHz models began stocking in June. And, a new Motorola digital 2.4GHz multi-handset product line began stocking several weeks ago. Moreover, checks indicate sell-through is tracking well, bolstering our confidence for 2nd half. Expect new DECT (European cordless) and Bluetooth products to be released in 4th quarter 2003. Model assumes traction in new products is weighted towards 2nd half 2004, making EPS compares negative through 1st half 2004.
Needham upgraded Advanced Micro to Buy from Hold following stronger than expected results. The firm cited the following factors for their upgrade: they are impressed with the company's restructuring actions over the last few quarters, they have been positive on the potential for the co's new 64-bit microprocessor offerings for some time, they consider the increased exposure to flash memory to be positive, and a fair amount of the financial statement uncertainty surrounding the flash memory consolidation has now been removed. Target is $13.
AMD's 2nd quarter results were better than the lowered expectation following the June 25 pre-announcement. Revenues declined 9.7% Quarter over Quarter to $645 million, beating expectations of $615 million. The difference came from flash, where revenue declined 3.2% Quarter over Quarter versus estimate of 20.6%. AMD's cost reduction program bore fruit in the quarter, and AMD managed to reduce its costs to $769 million, better than its target of $800 million. Expect the company’s microprocessor shipments to increase sequentially by 6.6% to 7.0 million units in 3rd quarter and 10.7% to 7.7 million units in 4th quarter, mainly driven by seasonality as well as the launch of Athlon-64 processors for the desktop and notebook PC market in September. Expect AMD’s share in the microprocessor market in 3rd quarter to be similar to 2nd quarter at 15.3% and improve to 15.5% in 4th quarter. Although expect AMD’s flash market share to increase to 20% from 11% in 3rd quarter from the new JV, we expect oversupply to continue through 2003 and that flash pricing continues to come under pressure. However, expect AMD’s flash memory revenue to grow 5% to $221mn in 3rd quarter (excluding the $180 million from the new JV) as unit growth outpaces ASP decline. A number of concerns linger with AMD: (1) The level of inventory on the company's books rose for the fifth consecutive quarter in 2nd quarter 2003. This is a concern because AMD pla ns to launch the Athlon-64 in September, and think inventory will continue to increase at the end of 3rd quarter because of the launch. (2) Intel could get more aggressive in flash memory pricing in 2nd half 2003. Current valuation appears attractive at 1.1x book and 1.3x end-2003 book, and AMD is about to enter a new product cycle, prefer not to take a more positive view on the stock until we see traction with the Athlon-64 products. In addition, analysts forecast book value per share to erode to $5.6 at the end of 2004 from $6.6 at the end of 2nd quarter 2003.
Boxmakers . . . Apple beat consensus revenue/EPS, posting sales of $1.545 billion and EPS of $0.05. Revenue of $1.54 billion, up 8% year/year and 5% sequentially, was above the company’s guidance for flat sequential revenue from $1.47 billion in March. Revenue was based on stronger-thanexpected unit shipments of 771,000, up 8% sequentially but down 5% from the year-ago period. Apple’s systems ASP of $1,419 was down 8% from $1,546 last quarter (on units of 711,000) and down 1% from last year’s systems ASP of $1,436 (on total shipments of 808,000) based on a greater mix of lower-end iMac/iBook. In the U.S. education market, Apple’s unit sales grew 5% year/year (against IDC’s forecast for a 19% decline for the U.S. education market in 2nd quarter) based on continued strength in portables sales which came in at 47% of education units. The firm enters 4th quarter with proven momentum on iPODs, emerging ramp on G5 PowerMac desktops, rising retail footprint, and prospects for eventual availability on iTunes/Music Store on Windows platforms. However, OM’s are not likely to be much better than 1-2% and whether margins can normalize to much higher levels remains unclear, despite new initiatives. Balance sheet remains solid with $4.24 billion net cash; but shares currently trade at over 70X projected 2004 EPS.
Total iMacs shipped were 287,000, up seasonally by 12% from 256,000 in the March quarter, although revenues were flat sequentially at $301 million highlighting the mix shift toward lower-end SKUs such as the eMac. Overall iMac sales are being impacted from the ongoing shift toward mobility and desktop replacement, as units were down 24% from 378,000 units in the year-ago period which translated to a year-over-year revenue decline of 29% from $424 million in the year-ago period. Ahead of the anticipated G5 launch, Power Mac unit sales fell 15% sequentially to 133,000 units from the March quarter’s 156,000 units, contributing $234 million in revenue which was down 20% sequentially. Weakness in professional buying patterns (particularly in creative markets) resulting from adverse economic conditions as well as the price/performance gap with comparable Wintel systems continued to hamstring Power Mac sales, although Apple’s management of channel inventories ahead of the pending G5 launch constrained Apple’s supply capability. The key issues going forward for the Power Mac are whether the pending G5 launch will lead Wintel customers to defect to PowerPC/Mac OS and if the G5 can spark a replacement cycle in Apple’s installed base? A “switch” from Wintel/Lintel to Mac is unlikely given the perceived switching costs and high relative entry cost of G5-based hardware. Secondly, while Apple can see an upgrade cycle from professional users, there are risks associated with the ramp of a new processor, along with the prospect that customers for Apple’s other major product lines stall knowing that there is a G5 upgrade coming.
While Apple refused to disclose any specific details regarding the economics or profit profile of
iTunes, the company did disclose that over five million songs were downloaded from the iTunes Music Store during the June quarter and 6.5 million have been downloaded to date. Moreover, CFO Anderson indicated that the iTunes Music Store was “very close to breaking even” during its first quarter of release, highlighting potential leverage once it becomes available for the Windows market which is still expected by year end. Importantly, iPod sales were a record 304,000 units, up from 80,000 in the March quarter and 54,000 in the year-end period. Assuming a $400 ASP (Apple sells three SKUs at $299, $399 and $499), iPod revenues were an estimated $120 million, or roughly 8% of Apple’s total sales mix.
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