| | Semiconductor Equipment . . . SG Cowen was sanguine on equipment maker Novellus Systems, telling clients that it expected an "encouraging tone" at the company's mid-quarter update Thursday on belief that the order environment has "firmed somewhat." Cowen feels that the stock could trend higher as a sustainable order recovery unfolds.
United Micro upgraded at Merrill Lynch to Buy from Neutral. The firm is saying now is the time to go long UMC given the stock's limited downside risk, an improving returns profile, and an attractive valuation. Also, margins are likely to show material improvement on rising units, and the co should meet the high end of its 3rd quarter guidance and momentum is likely to carry into 4th quarter.
Semiconductors . . . Intel's CEO Craig Barrett cited concerns over the potential re-emergence of the SARS virus in China this autumn. He suggested it could seriously hurt the country's economy. These comments were made during the news briefing in China on Wednesday about Intel's plan to spend $200 million building a new facility in the inland city of Chengdu, Sichuan province.
ATI Tech downgraded at UBS to Neutral from Buy based on valuation. The firm raises target to US$15.60 from $13.75.
Asustek might launch own brand graphics card utilizing ATI solutions according to Digitimes. In addition, Asustek is a key customer for NVDA's graphics chipsets in Asia.
Fifteen chip companies will be presenting at the 2003 Smith Barney Tech conference September 2-4, including (in order of presentation) Agere, Micron, PMC-Sierra, Broadcom, IDT, AMD, Altera, Texas Instruments, Analog Devices, Pixelworks, International Rectifier, Amkor, Marvell, Fairchild and Cypress Semiconductor.
In addition, National Semiconductor will be releasing earnings during market hours on Thursday the 4th, and expect in-line results and outlook. Intel will keep to its original schedule of a 3rd quarter business update after the market closes on Thursday (likely a non-event at this point).
Overall, analysts are unable to find a company in our coverage that hasn't seen good orders (considering the season) quarter-to-date. As such, management teams will likely sound relatively comfortable with current expectations. Among the companies likely to be overtly bullish are Broadcom, Micron, Cypress and International Rectifier, for both fundamental and stylistic reasons.
In prior years, there is a tendency to enter the conference with unrealistic expectations for what the companies will be able to say. Although the month will be only a business day or two old, for example, it is hard to resist asking the question "how is September going so far?" Since September is a pivotal month for 3rd quarter, however, expect that most companies will still use the standard oxymoron 'cautiously optimistic' to describe their outlook at the time of our conference.
Probably one of the key chip companies to watch will be Texas Instruments, and COO Rich Templeton is giving the luncheon keynote on Wednesday. Although we expect that the company will not change its outlook for 3rd quarter at that time and Templeton will most likely focus upon larger industry themes, his words will likely be deconstructed ad infinitum for any hints about current business trends. Expect that the company will keep its powder dry until its official update on September 9th. At this point we believe that there is a slightly positive bias to sales but little EPS impact due to margins.
For better or worse, some chip companies are likely to have little incremental to say at the conference after the amount of news flow in August. For example, Broadcom, Analog Devices and Marvell have either released earnings or given specific guidance updates in August. IDT and Altera will have already given 3rd quarter business updates in the days before each presents (IDT on 8-28-03, Altera 9-2-03). We have already heard from Intel (which is not presenting) -- although we expect the company will narrow the range around the center point of its guidance at the time of its previously scheduled business update on Thursday afternoon.
In light of that, investors will likely expend a fair number of calories trying to reconcile improving chip orders with the trends for hardware companies. In general, expect good alignment between improving hardware and chip trends, but discrepancies are likely to draw a lot of attention given nosebleed chip stock valuations.
Company-Specific Notes
Altera is providing its mid-quarter business update after the market closes on Tuesday and will present at the conference before lunch on Wednesday. Altera started the quarter needing 'turns' in the upper 60% neighborhood (slightly more than 2nd quarter) to achieve its sales guidance of 1-4% Quarter over Quarter sales growth. Conditions quarter-to-date are consistent with that turns requirement, if not slightly ahead. Do not count upon Altera bumping up the guidance range slightly, but we wouldn't rule it out either.
New products (including the Stratix and Cyclone families) grew north of 20% Quarter over Quarter in June, and the ramp in these products is likely helping Altera get a little better growth than Xilinx for the time being. (FYI, Xilinx does not give its business update until September 9th and is not presenting at conference.)
IDT provides its mid-quarter update on Thursday (8-23-03) after the market closes. IDT was perhaps one of the more disappointing reports in the June earnings season with calendar 3rd quarter sales guidance flat to down 4% Quarter over Quarter. One of the areas of concern management highlighted at the time of its earnings release was a build-up of inventory of components going into wireless base-stations, particularly in China. IDT's sales into the wireless infrastructure segment had been especially strong in the last few quarters, but it is now likely to slow. By most reports, the SRAM pricing environment has improved slightly, but management had counted upon that effect when originally providing guidance. Overall, expect that management will leave guidance unchanged for September.
National Semiconductor is not presenting at Smith Barney's Technology Conference, but is reporting its 1st quarter (Aug) results during market hours on Thursday, September 4. The company guided revenues to be flat to down 4% sequentially and we believe that results will generally be within this range ( model reflects a 2% quarterly decline.) Additionally, believe orders were pretty slow in June, picked up meaningfully in July, and subsequently flattened out for a more normalized August.
Analysts are currently expecting August revenues of $417 million (-2% Quarter over Quarter), gross margin of 44.2%, and EPS of $0.12. For 2nd quarter (November) analysts are currently modeling revenues of $425 million (+2% QoQ), gross margins of 45.9%, and EPS of $0.19. The big EPS bump is due to lower OpEx after shedding some of the company's unprofitable business lines such as Geode (which was sold to AMD). Excluding the sale of Geode (about 3% of August sales), sales estimate for November would have been up 5% -- in-line with seasonal norms for National.
On its conference call the company will probably talk about strength in wireless components (where the company has been gaining share) and components for flat panel displays. Expect that guidance will be in-line with estimates, which implies sales slightly less than consensus (up 2% versus up consensus of up 4.6%) and EPS a penny better ($0.19 versus $0.18 consensus). Believe the discrepancy is that some analysts may have not yet updated models following the sale of Geode. While probably not much of a real fundamental setback, guidance could cause some confusion on Thursday. Believe that investors looking for meaningful upside to the outlook will be disappointed.
Expect PMC-Sierra will be fairly constructive about trends through the first two months of the quarter with business tracking slightly up sequentially (model is flat, consensus up 1.5%). Believe that the networking space (at about 15% of sales) and other product revenues (35%, comprised mostly of printing applications) are the better performing segments for the company. Service provider revenues at about 50% of sales are somewhat lagging the generally improving backdrop for semi demand. Anticipate that PMC should see seasonally better business trends into the December quarter (our estimate and consensus is up about 5% Quarter over Quarter for 4th quarter).
Although doubt whether there is any upside potential in the quarter, it is likely that Agere is seeing generally improving trends for September as it benefits from the seasonal improvements in HDD ICs and wireless baseband chips. Storage ICs account about 35% of Agere product mix with Maxtor and Seagate as its two largest customer. Agere has seen improving sales trends from its GPRS wireless handset business through Samsung, Compal and NEC. Agere's Infrastructure sales at 25-30% of revenues continue to be sluggish for the company consistent with guidance for September. Market share losses in WLAN should also temper the company's prospects.
Analyst recently increased our estimates and price target for Cypress since the company is gaining back market share in wireless memories (with so-called pseudo-SRAMs) and the company is also benefiting from a good product cycle in USB 2.0. In general, the pricing environment is a little better, including the commodity SRAM business. We have encountered reports of strong demand for Micron-branded SRAMs that Cypress is now reselling (after buying the chips from Micron as it exited the business). Expect that Cypress's wireline communications business is lagging the Quarter over Quarter growth in the wireless and computing areas for the company. Overall, Cypress is likely to be one of the more upbeat chip companies at the conference.
Marvell reported its July-ending quarter last Thursday and guided to strong Quarter over Quarter of growth for October based on strength in HDD and Gigabit Ethernet chips. Marvell derives about 55% of sales from the HDD IC market and the company is currently benefiting from the seasonal strength in the October quarter in HDDs as well as SOC ramps at Western Digital and recent design- wins at Fujitsu. Expect the company to continue to be bullish during conference, but do not expect any update to current guidance.
Fairchild Semiconductor Chairman, President, and CEO Kirk Pond will be presenting at the conference. Like most chip companies under coverage, Fairchild's orders picked up in July driven by recovery in wireless and China (roughly 20% of sales) have been relatively stable through August. Fairchild's wireless exposure is mostly power management building blocks going into cellular handsets and related applications. On the company's 2nd quarter conference call (July 17) management gave relatively disappointing 3rd quarter revenue guidance of down 4-6% Quarter over Quarter, citing summer seasonality and excess inventory due to SARS. We are modeling revenues to decline 4% sequentially to $334 million. Distributor inventories rose 8% Quarter over Quarter in 2nd quarter with that portion of the business comprising 65% of sales. As Fairchild recognizes revenues upon shipments into the disti channel, the inventory increase accounted for a full 5% of sales in 2nd quarter. Those inventories will be worked lower at the expense of 3rd quarter sales. Recent channel checks, however, indicate that distributors are still ordering product, which could be a slight positive versus the steep Quarter over Quarter revenue fall off discussed on last month's conference call.
Pricing remains difficult in both analog and logic interface with Texas Instruments continuing to be the price aggressor. Ironically, discrete ASPs are the relative bright spot for Fairchild with leadtimes moving higher and utilization rates rising at the company. Indeed, discretes could be picking up momentum as capacity remains limited. The pricing data is consistent with that of the SIA in recent months, which has shown discrete ASPs about flat and standard analog ASPs falling. Seasonality is also working against the company in 3rd quarter with normal seasonal declines of about 5% or so. 1st quarter and 3rd quarter are seasonally down while 2nd quarter and 4th quarter are usually seasonally up.
Net, net, it appears that the quarter is on track to meet management's guidance with no breathtaking upside or downside yet evident. Stronger wireless, offset by distributor inventory overhang and lower seasonality, indicate the company is probably trending towards -4% Quarter over Quarter revenue estimate.
robblack.com
I realize that some of this is old news now on NVLS for instance.
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