TO ALL
GOOD MORNING !
The Wall Street Journal -- October 10, 1997
Chip Industry
Expected to Post
Moderate Gains
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Despite Firms' Warnings,
Sales of PCs Spurred
Semiconductor Demand
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By Christopher Grimes
Dow Jones Newswires
NEW YORK -- Despite some notable earnings warnings in the third quarter, the semiconductor industry performed relatively well in what is typically its toughest period.
Personal-computer sales appeared to have increased somewhat over the summer, spurring demand for microprocessors. Memory-chip prices suffered, but semiconductors used in the wireless and telecommunications industries sold at a decent clip. Many chip-equipment companies are expected to post strong earnings, too.
"I think we're going to get some reasonably good reports in the next couple of weeks," said Jonathan Joseph, an analyst at Montgomery Securities Inc.
Several chip companies already have said that they wouldn't meet Wall Street forecasts for the quarter. But the warnings, from the likes of Altera Corp. and TriQuint Semiconductor Inc., tended to be company-specific, analysts said.
The most notable example of this was Advanced Micro Devices Inc., which Tuesday posted a wider-than-expected loss for the third quarter. The Sunnyvale, Calif., company, twice warned in September that it was having problems producing enough K6 microprocessors. The company reported a third-quarter loss of 22 cents a share, compared with the 13-cent-a-share loss expected by Wall Street.
Earnings growth tracked by a Dow Jones index of seven semiconductor companies was expected to be 38% in the third quarter, down from the 55% rate in the second quarter. The projected deceleration was due in part to a tougher year-over-year comparison for the third quarter; the second quarter was up against the more depressed 1996 semiconductor sector, said Chuck Hill, research director at First Call Inc.
The tone of the chip market will be set next Tuesday, when Intel Corp. reports its earnings. Opinion varies on how the chip giant did in the quarter.
PC sales picked up at least marginally in the period, which should have led to strong unit sales for Intel. As a result, some analysts expect the company to have beaten the consensus estimate of 91 cents a share, while others think price cuts on older chips may have bridled earnings. Net income in the third quarter of 1996 came in at 75 cents a share, adjusted for a 2-for-1 stock split on July 14.
Early in the third quarter, Intel officials said they anticipated per-share earnings would be about flat with the 92 cents a share the company earned in the second quarter.
With an estimate of 97 cents a share, Smith Barney Inc. analyst James Barlage is at the high end of projections for Intel's earnings, which range from 85 cents a share to 97 cents a share. He said many of the product-transition issues that damped Intel's earnings in the second quarter seem to have been resolved.
But, Ashok Kumar of Southcoast Capital Corp. said PC strength was mainly confined to a few companies, such as Compaq Computer Corp. and Dell Computer Corp. Mr. Kumar's official earnings estimate for Intel is 94 cents a share, but he said the company probably will have earned a few cents a share less.
The analyst projects Intel's chip sales rose 16.2% to 21.5 million chips in the third quarter, from the 18.5 million chips sold in the second quarter. But, he said average selling prices for those chips dropped during that time to $215 from $255 as a result of price cuts on so-called classic Pentium chips.
Texas Instruments Inc., another large-cap semiconductor stock, appeared to have performed well in the quarter, based on the strength of its digital signal processor chips, or DSPs. The company has been shifting away from the price-sensitive memory-chip market toward DSPs, which are used in modems and cellular phones.
Krishna Shankar, an analyst at Donaldson Lufkin Jenrette Securities Corp., expects Texas Instruments to have earned $1.17 a share in the quarter, slightly higher than the $1.14-a-share consensus estimate. The Dallas company earned seven cents a share in the year-earlier period, excluding items. The figure was restated from 23 cents to account for the company's sale of its defense business.
Mr. Shankar said the market for semiconductors used in wireless telecommunications remains strong. "I think companies with exposure to the communications and wireless industries had a fairly good September quarter," he said.
LSI Logic Corp. is expected to have earned 33 cents a share for the third quarter, on a 3% increase in revenue from $332 million in the second quarter. LSI, of Milpitas, Calif., earned 21 cents a share on revenue of $300.2 million in third quarter of 1996.
Some analysts expect the report from VLSI Technology Inc., which derives about 50% of its semiconductor business from telecommunications, to exceed consensus estimates of 33 cents a share. The San Jose, Calif., company earned six cents a share, including a charge, in the year-ago period. Montgomery Securities Inc. analyst Clark Westmont, for example, estimated that VLSI earned 35 cents a share in the quarter.
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