GS US Semi and Semi Equip weekly ? Flash
capacity constraints easing? More earnings
previews
1) SanDisk?s earnings report last week may have meaningful ramifications for the DRAM
and semi equipment sectors. While it?s premature to draw any definitive conclusions, the
fact that SanDisk built inventory, in part due to an increase in available supply of high
density flash at the end of the quarter, may indicate that the flash supply/demand balance
is easing. If this were the case, those hoping for tight flash supply to bail out DRAM
pricing and, in turn, the semi equipment industry will be disappointed. Again, while it?s
too early to draw definitive conclusions, this bears close watching over the next several
weeks, 2) Another busy week of earnings ahead with 11 covered companies reporting;
TSMC, ALTR, KLAC, and MCHP headline the list, and 3) Weekly memory pricing
monitor and stock price performance exhibits.
POTENTIALLY INCREMENTALLY NEGATIVE IMPLICATIONS FOR THE DRAM
AND EQUIPMENT CYCLES FROM SANDISK'S EARNINGS REPORT. SanDisk's Q1
sales came short of expectations, as the company's bit shipments declined 13% Q/Q versus
our expectation of down 5%. The company attributed this to the fact that the market
shifted to higher-density flash faster than it had anticipated, and it did not have the
appropriate capacity supply in place throughout the quarter to meet that demand. This was
apparently exacerbated by a week-long fab shutdown at Toshiba early in January for the
New Year holiday. Towards the end of the quarter, SanDisk was able to procure enough
supply both internally (from its joint venture with Toshiba) and externally (from Samsung)
to meet high capacity demand, though it is now saddled with excess low capacity product.
In addition, SanDisk ramped its 90nm production from 50% of its total captive supply in
Q4 to 80% in Q1, and saw better than expected yields, further increasing supply. The
company's inventory days increased from 52 to 81; in fact, given a significant portion of
the increase was due to raw materials and work-in-process from high capacity memory
receipts late in the quarter, the equivalent grossed-up finished product inventory increase
is likely even higher.
While it's certainly premature to draw any definitive conclusions, our preliminary view is
that the tightness in NAND supply seen in early Q1 may be alleviated in Q2 as a result of
SanDisk/Toshiba's increase in output, which we estimate jointly account for 30% of global
NAND production. Our global NAND supply-demand model was forecasting 2%
oversupply in Q1. However, one week of downtime at Toshiba accounts for 1/13th of
30% of the industry total, or 2% of global NAND supply. We believe this was one of the
reasons for the supply tightness in Q1, even apart from the high capacity demand spike
due to new hot-selling consumer electronics items such as the iPod Shuffle and the PSP.
Now that high capacity shipments and 90nm yields at Toshiba have accelerated, we expect
NAND supply constraints may loosen a bit, which in turn makes it less likely on the
margin that DRAM capacity will migrate to NAND as recent reports have suggested.
If this situation plays out as we are suggesting, what seems to be an easing of the tight
flash supply constraints makes it less likely that the migration of DRAM capacity to flash
will bail out the DRAM industry and, in turn, the semi equipment industry. The bottom
line is that we maintain our view that DRAM price weakness will persist, eventually
causing a slowdown in equipment orders. Therefore, we retain our Cautious view on the
semiconductor equipment coverage group, and our Underperform rating on Micron in the context of
our Neutral semiconductor device sector view.
TSMC IS REPORTING ITS Q1 RESULTS ON TUESDAY. WE BELIEVE TSMC'S 2005 CAPEX
BUDGET IS SIGNIFICANTLY FRONT-HALF LOADED. TSMC is reporting its Q1 earnings
results on Tuesday morning in the US. Recall that TSMC has guided for a 2005 capex budget of
$2.5 billion - $2.7 billion, up about 8% year-over-year. As we have highlighted on numerous
occasions, while many on the Street and semi equipment managements continue to argue that the
foundries are likely to increase their order rates to the equipment suppliers in H2'05, we believe that
TSMC's 2005 capex budget is significantly front-half loaded.
Recall that TSMC has a liability on its balance sheet called "payables to contractors and equipment
suppliers." This line item at the end of 2003 was approximately $210 million and at the end of 2004
it was approximately $975 million, up about 365% year-over-year. This line item represents
equipment that has already been ordered by and shipped to TSMC, but will not be capex until the
cash payment is made to the equipment suppliers in Q1 and Q2. Further, of the remaining capex that
is not accounted for in the payable, the company has indicated on several occasions that it has
already placed most of those orders.
We believe that absent a very significant pick-up in end demand over the next several quarters
(which we view as unlikely), the foundries will make no new significant orders to the equipment
suppliers in H2'05. During our most recent Asia tour in late March, our meetings with the leading
foundries led us to believe that their future capex plans are being dictated by leading edge utilization
rates (which are higher than overall utilization rates), but very low overall utilization rates are
driving significantly lower profitability (and even potential losses for foundries like UMC over the
next few quarters). As a result of this lower profitability, the foundries are being forced to be more
cautious toward their forward looking capex plans as they attempt to mange their cash.
ALTR: COMMUNICATIONS SNAPBACK, PARTICULARLY IN WIRELESS
INFRASTRUCTURE, TO DRIVE ALTERA'S Q1 RESULTS
Table 1. GS and Street ALTR estimates
FQ1 (Mar) FQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 253.8 $0.15 261.7 $0.14
Consensus 254.4 $0.15 263.7 $0.15
Source: FactSet, Goldman Sachs Research estimates.
We look for Altera to report Q1 results inline with our estimates for revenues of $254M (up 6%
Q/Q) and EPS of $0.15, inline with the company's revised Q1 guidance of up 6% Q/Q; recall that
Altera raised its Q1 revenue outlook during its business update on March 9th from original guidance
of up 1-3% Q/Q. We are modeling Communications segment (44% of '04 revs) up 17% Q/Q on a
snapback, following a 24% Q/Q decline in the December quarter; we believe the communications
recovery to be principally related to wireless infrastructure. We are modeling flat-to-slightly down
Q/Q growth in Industrial/Automotive (30% of '04 revs), Digital Consumer (15% of '04 revs), and
the Computer/Storage (11% of '04 revs) businesses, given seasonal trend and choppy end demand in
these areas. We will also pay close attention to Altera's Q1 total inventory levels (Altera +
distribution), which stood at 4.2 months in Q4'04, above the company's target range of 3-4 months.
Looking forward to Q2; we expect Altera to guide for revenues to be up ~3% Q/Q, roughly inline
with the Q2 seasonal trend, as we expect comms to moderate to a more normal trend from a high
base in Q1 and the macro environment remains relatively tepid.
We rate ALTR IL within our Neutral Semi Devices coverage view. We continue to believe that
PLDs represent a strong long-term secular growth story in semis, given significant cost-reductions
and opportunities to replace functionality traditionally served by ASICs. The stock trades at CY'05
P/E and EV/S multiples of 31x and 5.7x, versus 10-year medians of 30x and 6.9x, respectively;
ALTR trades at a premium to the S&P multiple of 17x. As the company continues to exhibit strong
fundamentals, highlighted by market share gains and successful execution of long-term growth
plans, investors may consider current levels as a reasonable entry point to purchase the stock as a
longer-term holding, though we expect a choppy end-market environment will likely keep the stock
range-bound for the time being.
KLAC: EXPECT KLA-TENCOR TO GUIDE JUNE-QUARTER BOOKINGS UP
SEQUENTIALLY GIVEN THAT JUNE IS ITS FISCAL-YEAR END
Table 2. GS and Street KLAC CQ1 estimates
CQ1 (Mar) CQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs $530 $0.55 $480 $0.43
Consensus $528 $0.56 $514 $0.53
Source: FactSet, Goldman Sachs Research estimates.
KLA-Tencor is reporting March-quarter (third fiscal quarter 2005) earnings on April 28 after the
market close. We model revenues of $530 million (essentially flat sequentially) with earnings per
share of $0.55, versus the Street consensus earnings estimate of $0.56. We model calendar Q1 gross
orders of $460 million (down 7% sequentially), at the midpoint of company's guidance for orders of
down 1
5% to up 5% sequentially. Recall that the June-quarter is KLA's fiscal year-end so the company
typically guides June-quarter orders higher sequentially. We are therefore modeling CQ2 orders of
$500 million (up 9% sequentially).
No change to our Outperform rating on KLAC within our Cautious Semi Equipment coverage view.
We would expect KLA's P&L to hold up better than its front-end semi equipment peers over the
coming quarter given both the company's high levels of deferred revenues (about $610 million) and
significant backlog (about $760 million) as well as its exposure to technology transitions, which
tend to occur even during downturns. That said, we believe that KLA is also likely to experience
declining fundamentals in H2'05 as the company is exposed to the DRAM segment (like its peers),
which we expect to be weak. The stock is trading at about 29x our estimate of current full cycle
normalized EPS of about $1.40, vs AMAT at 30x and the S&P multiple of 17x, so the stock is not
cheap. That said, we believe that KLAC deserves a bit of a higher multiple than its peers given that
the company (along with LRCX) has driven peak-to-peak margin expansion while other semi
equipment companies have experienced peak-to-peak margin contraction.
MCHP: EXPECT MICROCHIP'S CQ1 (FQ4) RESULTS TO BE IN-LINE ON MIXED END
MARKET PERFORMANCE
Table 3. GS and Street MCHP Estimates
FQ4 (Mar) FQ1 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 205.5 $0.25 214.7 $0.27
Consensus 204.3 $0.25 212.3 $0.26
Source: FactSet, Goldman Sachs Research estimates.
We expect Microchip to report CQ1 (FQ4) results in-line with our estimates for $205.5M (up 0.1%
Q/Q)/$0.25, slightly above consensus of $204.3M/$0.25; guidance was for revenues of $205M. We
expect gross margin of 56.8%, within the guidance range of 56.5%-57.0%. We believe Microchip
experienced a solid start to the quarter in January, followed by a softer February and March. On an
end market basis, we believe consumer sales (~35% of overall sales) were seasonally slow, the
industrial end market (17% of sales) was steady, communications (14%) improving after weakness
in H2'05, and automotive sales (18%) may have been affected by North American auto weakness.
Looking forward, we are comfortable with our CQ2 (FQ106) estimates of $215M (up 4.5%
Q/Q)/$0.27 given relative strength in microcontrollers recently reported by Atmel and Texas
Instruments, above consensus at $212.3M/$0.26 but still below historical seasonality of up 5.8%
Q/Q.
We rate Microchip Outperform in the context of our Neutral Semi Devices sector view. We think
Microchip is positioned for continued share gains in the 8-bit MCU space while it also expands
sales and product range in16-bit MCUs. We also think gross margin will expand over time as
Microchip ramps production in its Gresham, OR fab. On a valuation basis, we think MCHP's better
earnings growth potential merits a higher CY'05E P/E multiple than the current 23x, vs. the semi
group median of 25x; MCHP trades at a premium to the S&P multiple at 17x.
AGR.A: AGERE'S RESULTS LIKELY SOLID W/ SALES IN UPPER HALF OF DOWN 2% TO
UP 2% Q/Q GUIDANCE RANGE; ALSO COULD COMMENT ON REVERSE STOCK SPLIT
Table 4. GS and Street AGR.A Estimates
FQ2 (Mar) FQ3 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 411.8 -$0.01 419.4 $0.00
Consensus 410.4 -$0.01 422.0 $0.00
Source: FactSet, Goldman Sachs Research estimates.
We expect Agere to report FQ2 (Mar) results towards the mid-to high-end of $400-420M (down 2%
to up 2% Q/Q) guidance with a relatively constructive outlook and we remain comfortable with our
estimates for FQ2 of $412M (up 0.4% Q/Q) / LPS -$0.01 and our estimates for FQ3 of $419M (up
1.8% Q/Q) / $0.00. We expect that the company continues to progress on its cost reduction efforts,
including reducing its operating expenses to $170-175M in FQ3. However, costs will likely stay
towards the high-end of the range due to additions from the Modem-Art acquisition, which will also
impact share count going forward, as 70.3M shares were issued in relation to the acquisition. In
addition, we would expect Agere to provide an update on the timing for share class consolidation
and a reverse stock split, which was approved byshareholders in February; we believe these actions
will likely be completed sometime during the June quarter.
We rate AGR.A In-Line in the context of our Neutral Semi Devices coverage view. We are
modeling Storage segment (~40% of sales) at down 8% Q/Q in FQ2 as we believe HDD industry
trends have reflected strength in small form factor and consumer, offset by seasonal decline in
desktop; Agere's HDD business is also impacted in the quarter by a certain customer's product
transition. We are modeling Mobility segment (~20% of sales) growth at up 9% Q/Q driven by
Samsung unit recovery, offset by decline of 3G ASIC to NEC; we note Samsung handset shipments
were better than expectations (up 16% Q/Q at 24.5M units). We believe the telecommunications
segment (~15% of sales) experienced improvement after an inventory correction in H2'04, and we
expect enterprise and networking segment (~25% of sales) to be in-line with guidance for low
single-digit growth driven by a recovery of Sirius satellite radio receiver chipsets, though recent
enterprise-related weakness indicated by IBM and several smaller networking companies does give
us some pause regarding the outlook.
MCRL: MICREL'S QUARTER LIKELY STARTED STRONG AND MODERATED TOWARD
THE END; EXPECT Q1 MICREL RESULTS IN-LINE
Table 5. GS and Street MCRL Estimates
FQ1 (Mar) FQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 57.3 $0.04 60.2 $0.04
Consensus 59.0 $0.05 61.1 $0.05
Source: FactSet, Goldman Sachs Research estimates.
We are comfortable with our below-consensus Q1 estimates of $57.3M (down 3.6% Q/Q) / $0.04.
We think the solid start to the quarter described by management at the GS Technology Conference
in February slowed down in the second half, as channel inventory restocking has yet to occur given
continued cautious outlooks by distributors. Upside in Samsung's handset shipments (Q1 shipments
of 24.5M (up 16% Q/Q) were above original guidance) may have provided some benefit but is
unlikely to have fully offset broader trends. Our Q2 estimates of $60.2M (up 5.0% Q/Q) / $0.04 are
in-line with historical seasonality of up 5% Q/Q. We think upside to our Q2 estimates is unlikely
given choppy CDMA trends and high stocking representative inventories.
We rate Micrel Underperform in the context of our Neutral Semi Devices sector view. We expect
that Micrel will see slower growth and lower margins than analog peers due to past turnover of
design engineers and continued low fab utilization. Micrel's CY'05E P/E of 41x is well above the
semi group median of 25x, which we do not think is supported by its prospective growth rate.
MPWR: BELIEVE MONOLITHIC POWER'S Q1 BUSINESS TRENDS HEALTHY, EXPECT
IN-LINE RESULTS; RECENT LOSS OF DESIGN ENGINEERS A LONGER-TERM CONCERN
Table 6. GS and Street MPWR Estimates
FQ1 (Mar) FQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 13.5 $0.01 16.0 $0.05
Consensus 13.5 $0.00 15.1 $0.05
Source: FactSet, Goldman Sachs Research estimates.
We think Monolithic Power experienced relatively solid business trends and we are comfortable
with our $13.5M (down 8.8% Q/Q)/$0.01 estimates, consistent with management guidance for
revenues of $13.0-$14.0M. We expect the company at least held its share in notebook backlight
inverters, with seasonal notebook slowness in Q1 and improved traction at HP and Apple. Though
the consumer end market was likely seasonally slow in Q1, we believe Monolithic is beginning to
see demand for products suitable for use in LCD TVs, including inverters,
audio, and converter products. Despite tepid end market demand conditions and essentially seasonal
PC growth, we are comfortable with our above-consensus Q2 estimates of $16.0M (up 18.5% Q/Q)
/ $0.05 (vs. Street estimates of $15.1M/$0.05), as better Q1 bookings and higher purchase
commitments suggest upside in Q2. In addition, strength in notebooks in Q1 highlighted by Intel has
a positive read-across to Monolithic, which derives close to half of its sales from that end market.
We rate Monolithic Power In-Line in the context of our Neutral Semi Devices sector view. We think
the company is making progress towards becoming a broad-based analog company though
introductions of new products, expansion of its sales/distribution network, and increased marketing
efforts. However, litigation remains a major risk to the company and could cause near-term
choppiness as trials with O2Micro, Linear Technology, and Sumida will commence in Q2. In
addition, we have recently become aware of recent departures by a couple of analog design
engineers at Monolithic, as well as a couple of engineers getting laid off. This may present an
additional risk if the company is not able to recruit suitable replacements within a reasonable
amount of time. Given Monolithic's growth prospects, we believe CY'05E P/E multiple of 28x is
reasonable versus the semi group median at 25x and the S&P multiple of 17x.
VLTR: WE SEE DOWNSIDE RISK TO OUR VOLTERRA Q1 ESTIMATES ON IBM
WEAKNESS, MODERATION OF ORDERS IN THE BACK HALF OF THE QUARTER
Table 7. GS and Street VLTR Estimates
FQ1 (Mar) FQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 14.4 $0.10 15.0 $0.10
Consensus 14.3 $0.09 15.1 $0.10
Source: FactSet, Goldman Sachs Research estimates.
We see some risk to the downside to our Q1 estimates for Volterra of $14.4M (down 2% Q/Q) /
$0.10, versus company guidance for revenues of $13.7M-14.6M (flat to down 6% Q/Q). We think
IBM's shortfall in the quarter and some bookings moderation towards the second half described by
several analog companies could affect Volterra's results or guidance; note that servers/storage and
IBM represented 69% and >20% of 4Q sales, respectively. With visibility still limited and choppy
end market demand, we believe our Q2 estimates of $15.0M (up 4% Q/Q) / $0.10 are conservative
enough. Any new design wins would be a positive, particularly in graphics where Volterra
continues to work to gain new customers.
We rate Volterra In-Line in the context of our Neutral Semi Devices sector view. We see Volterra's
solution as "a better mousetrap" with competitive advantages that over time should lead to
incremental design wins and revenue growth. We think the sell-off of VLTR shares year-to-date has
been somewhat overdone given Volterra's strong fundamental competitive position, though
customer concentration remains a risk. VLTR trades at 28x CY'05E P/E, only slightly above the
semi group median of 25x despite its higher expected earnings growth rate; VLTR trades well above
the S&P multiple of 17x.
AMCC: EXPECT APPLIED MICRO CIRCUITS' RESULTS IN-LINE ON COMMUNICATIONS
RECOVERY W/ RETURN TO PROFITABILITY LIKELY
Table 8. GS and Street AMCC Estimates
FQ4 (Mar) FQ1 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 64.4 $0.01 65.8 $0.01
Consensus 62.8 $0.00 65.6 $0.01
Source: FactSet, Goldman Sachs Research estimates.
We expect Applied Micro Circuits to report results in-line with our FQ4 (Mar) estimates of $64.4M
(up 5.4% Q/Q) / $0.01, which is at the high-end of company guidance for low-single digit revenue
growth and ahead of street estimate for $62.8M (up 2.8% Q/Q) / $0.00. We believe the
communications segment likely saw continued improvement from a sharp inventory recovery
(Sep-04) and traction of newer products, while storage business trends were essentially as expected
(modest growth) during the quarter. We believe restructuring efforts are on track to provide targeted
operating expense savings of $6-8M/quarter (relative to Dec-04 quarter), which should drive a
return to operating profitability, beginning in the Jun-05 quarter. Also, we look for new President
and CEO Kambiz Hooshmand to discuss his initial thoughts on the company and long-term strategy;
recall Mr. Hooshmand's appointment was announced on March 9 and was effective on March 20.
For CQ2 (FQ106), we are comfortable with our estimates of $65.8M (up 2.2% Q/Q) / $0.01, as
communications/storage end market trends have been relatively mixed and visibility continues to be
limited.
We rate Applied Micro Circuits Underperform in the context of our Neutral Semi Devices sector
view. We are encouraged by the improving cost structure as well as the selection of Kambiz
Hooshmand as President and CEO, who we expect will provide better clarity around AMCC's plans
for integration of its acquisitions and long-term growth strategy. However, the business still has a
number of moving pieces and we prefer to stay on the sidelines as we await greater visibility
regarding success of business diversification efforts. We prefer to use P/E multiples to value
semiconductor stocks, however, as we estimate Applied Micro Circuits will generate a low level of
earnings in CY'05E, we are utilizing EV/S multiples to assess relative valuation. AMCC trades at a
discount to the semi group, at CY'05E EV/S of 1.6x vs. semi median of 2.8x.
We expect AMI to report Q1 inline with its guidance range for revenues of down 6-8% Q/Q and
EPS (pro forma) of $0.10-$0.12, and we remain comfortable with our estimates of $115M (down
7% Q/Q) and EPS of $0.11. We believe that Q1 trends are being impacted by broad-based inventory
corrections at customers. In addition, the Automotive business, which accounted for 26% of '04
sales, could be an overhang given recent inventory/production concerns related to US automakers.
We note that AMI derives ~70% of its automotive sales from European customers such as Siemens,
Bosch and Hella, which could provide some insulation, but we would not be surprised if overall
industry growth rates are depressed. For Q2, we are modeling 5% Q/Q revenue growth, slightly
above the 3-year Q2 average growth of 3.7%, with the growth expectation driven by Industrial
business design wins related to white goods and a modest snapback post an inventory correction.
We also look for AMI to provide commentary regarding its progress toward its target operating
model of 50% gross margin and 23% operating margin in 2005, which could prove to be optimistic
given depressed growth in 2005 (we are modeling -5% growth for AMI in 2005), as well as an
update on the company's relocation of its new test facility in Manila, which caused AMI to ramp
inventories in Q4 in an attempt to ensure seamless customer product delivery during the transition,
but is also weighing on utilization and margin during the interim (AMI expects overall utilization to
be below 70% in Q1, down from 72% in Q4'04).
We rate AMIS In-Line within our Neutral Semi Devices coverage view. The company targets stable
but non-explosive growth markets, which should continue to drive solid returns given lengthy
product cycles and relatively non-capital intense business model. AMIS trades at CY'05 P/E of 18x,
versus coverage group median of 25x and the S&P multiple of 17x. The stock has reacted favorably
in recent weeks on news of the company's recent debt refinancing, which is estimated to contribute
an incremental $0.05-$0.06 annual benefit to EPS in the form of decreased interest expense; we upd
ated our model on 3/28, raising CY'05E to $0.58 from $0.54, CY'06E to $0.75 from $0.69, and
CY'07E to $0.74 from $0.69. We view valuation as interesting on a relative basis to the group given
AMI's solid cash flow yield (6.7% versus semiconductor group median of 3.4%), but expect stock
momentum to be relatively in-line pending recovery/acceleration of business fundamentals.
LSI: EXPECT LSI'S RESULTS CONSISTENT W/ PRE-ANNOUNCEMENT, GUIDANCE
LIKELY CONSERVATIVE DUE TO CHOPPY MKT TRENDS, IN PARTICULAR FOR
STORAGE SYSTEMS
Table 10. GS and Street LSI Estimates
FQ1 (Mar) FQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs 431.1 $0.05 444.1 $0.08
Consensus 427.4 $0.04 437.4 $0.06
Source: FactSet, Goldman Sachs Research estimates.
We are modeling LSI to report Q1 (Mar) results of $431M (up 3% Q/Q) and EPS of $0.05, which is
toward the high-end of the company's revised Q1 guidance. Recall that LSI pre-announced on
March 14th, raising revenue expectations to $420-$435M (flat to up 4% Q/Q) from its original
projection of $400-415M (down 1%-5% Q/Q); the company did not update EPS guidance, which
was projected at $0.01 to $0.04. We believe the company experienced strength in the quarter related
to Consumer (15% of '04 sales) and Storage Components (39% of '04 sales), driven by product
ramps (MP3/PortalPlayer, DVD- Recorder, and SAS) and a supply chain snapback (continuing
recovery started in Q4'04). We are modeling a decline in Storage Systems (27% of '04 revs) and
Communications (19% of '04 revs). For Q2, we look for LSI to provide relatively conservative
guidance given continued choppy end market trends, in particular related to storage systems as
noted by IBM and StorageTek, which are amongst LSI's largest customers in this business unit.
LSI trades at '05 multiples of 17x P/E and 1.1x EV/S, vs the semi group medians of 25x and 2.8x,
respectively; LSI trades in-line to the S&P multiple of 17x. We continue to rate the stock
Underperform within our Neutral Semi Devices coverage view, as we continue to take a
wait-and-see approach given secular concerns related to the ASIC business and choppy business
momentum. That said, LSI continues to make good progress with its evolving business model
towards fab light ASICs and ASSPs.
MKSI: THE CURRENT ENVIRONMENT FOR MKS IS LIKELY FLATTISH BUT WE REMAIN
CONCERNED THAT MKS' BUSINESS IS LIKELY TO DETERIORATE IN H2'05 AS
BUSINESS AT ITS SEMI OEM CUSTOMERS WORSENS THROUGHOUT THE YEAR
Table 11. GS and Street MKSI CQ1 estimates
CQ1 (Mar) CQ2 (Jun) Rev ($M) EPS Rev ($M) EPS Goldman Sachs $120 $0.11 $110 $0.06
Consensus $120 $0.10 $118 $0.09
Source: FactSet, Goldman Sachs Research estimates.
MKS is reporting earnings on April 26. We model Q1 revenues of $120 million (down 8%
sequentially) and earnings per share of $0.11, versus the Street consensus earnings per share
estimate of $0.10. Last week, one of MKS' competitors in the subcomponent space, Advanced
Energy, reported its Q1 results. Revenues were a bit above our estimate and the company saw about
8% sequential sales growth in its semi equipment business. We continue to believe, and Advanced
Energy's report supports the notion, that the near-term outlook appears relatively flattish for the
subcomponent companies. We believe that the flattish environment is being driven by semi
equipment shipment levels that have held in thus far in 2005. That said, we expect a deteriorating
fundamental environment in H2'05 for the subcomponent companies, as we expect semi equipment
shipments to decline as the industry soaks up the excess capacity that has been and continues to be
added.
No change to our In-Line rating within our Cautious Semi Equipment coverage view. The stock is
trading at 38x our estimate of current full cycle normalized earnings per share of $0.40 vs. AMAT
at 30x and the S&P multiple of 17x, so it is expensive. Rich valuation, coupled with our concern
that fundamentals are likely to deteriorate for MKS' customers, and in turn MKS, as we progress
throughout 2005, lead us recommending that investors remain on the sidelines in the name.
MARCH SEMI BOOK-TO-BILL OF 0.81 WAS UP FROM 0.77 IN FEBRUARY ON FLAT
ORDERS MONTH-OVER-MONTH AND A 5% MONTH-OVER-MONTH DECLINE IN
SHIPMENTS. Semiconductor Equipment and Materials International (SEMI) released its
three-month rolling average US equipment manufacturers' book-to-bill of 0.81 for the month of
March (vs. our 0.78 estimate) on Tuesday last week. Overall orders of $1,022 million (flat
month-over-month, -26% year-over-year) were 5% above our estimate. Overall shipments of $1,269
million (-5% month-over-month, flat year-over-year) were 2% above our estimate. The front-end
book-to-bill was 0.78 on orders -1% month-over-month (5% above our estimate) and shipments -5%
month-over-month (1% above our estimate). The back-end book-to-bill was 0.99 on orders +4%
month-over-month (7% above our estimate) and shipments +1% month-over-month (6% above our
estimate). The February book-to-bill was revised downward to 0.77 from 0.78 on 1% higher
shipments with orders essentially unchanged.
While back-end orders and shipments appear to be stabilizing
at current levels, as supported by
Teradyne's earnings report last week and the book-to-bill data, we remain concerned that the
back-end companies are not likely to see a significant up-tick in order/shipment rates in the
near-term given that our checks suggest that their customers remain cautious in regards to their
spending plans and the overall environment remains choppy. Further, we believe that the back-end
companies are posting significant losses this cycle due to a very difficult pricing environment that is
driving significant margin erosion. Front-end orders declined slightly month-over-month in March.
We believe that front-end orders are likely to deteriorate meaningfully in the coming quarters driven
by a fall off in DRAM spending as we move throughout Q2 and H2'05.
We are estimating a flat overall book-to-bill ratio in April at 0.81 on a -4% m-o-m decline in orders
and a -4% m-o-m decline in shipments. We are modeling three-month rolling average overall orders
of $979 million (-4% m-o-m) and overall shipments of $1,215 million (-4% m-o-m). We estimate
front-end shipments of $1,070 million (-5% m-o-m) and front-end orders of $835 million (-5%
m-o-m), yielding an estimated front-end book-to-bill ratio of 0.78. We estimate back-end shipments
of $145 million (-1% m-o-m) and back-end orders of $144 million (flat m-o-m), yielding a back-end
book-to-bill ratio of 0.99. We continue to emphasize that that the book-to-bill should not be a
significant trading event for the stocks as it is an unaudited and backward looking metric.
WEEKLY MEMORY MONITOR. NAND flash memory spot prices were up 1.3% M/M as
moderate supply tightness continued. Retail prices increased slightly (3% month-over-month).
Pricing continues to benefit from better-than-expected demand, likely driven at least in part by
product cycles including iPod Shuffle and Sony PlayStation Portable. As we highlighted above, the
near-term price trends bear watching given what seems to be some alleviation of tight capacity for
flash suppliers in recent weeks.
This week's calendar:
Monday 25 April: (1) Altera (ALTR-$19.01; IL/N) reporting earnings. GS $0.15; Street $0.15. (2)
Volterra (VLTR-$11.87; IL/N) reporting earnings. GS $0.10; Street $0.09.
Tuesday 26 April: (1) Agere (AGR.a - $1.25; IL/N) reporting earnings. GS -$0.01; Street -$0.01. (2)
MKS Instruments (MKSI-$15.18; IL/C) reporting earnings. GS $0.11; Street $0.10. (3) TSMC
reporting earnings.
Wednesday 27 April: (1) LSI Logic (LSI-$5.31; U/N) reporting earnings. GS $0.05; Street $0.04.
(2) Microchip (MCHP-$25.36; OP/N) reporting earnings. GS $0.25; Street $0.25. (3) UMC
reporting earnings.
Thursday 28 April: (1) AMI Semiconductor (AMIS-$10.95; IL/N) reporting earnings. GS $0.11;
Street $0.11. (2) Applied Micro Circuits (AMCC-$2.71; U/N) reporting earnings. GS $0.01; Street
$0.00. (3) Micrel (MCRL-$8.16; U/N) reporting earnings. GS $0.04; Street $0.05. (4) Monolithic
Power Systems (MPWR-$7.26; IL/N) reporting earnings. GS $0.01; Street $0.00.
Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Entegris Inc. in
the proposed merger with Mykrolis Corp. Goldman Sachs & Co., and or one of its affiliates, will
receive a fee for its financial advisor role.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my
personal |
