Bottoms Up for Chip Sector
by: Shlomi Cohen March 12, 2009
Based on the results reported last week by two semiconductor firms Sigma Designs (Nasdaq: SIGM) and Marvell Technology Group (Nasdaq: MRVL) that are held in my portfolio, tracked by "Globes", it may be assumed that we have reached a bottom.
In the quarter ended January, Marvell's revenue fell to $513 million, a decrease of 35% compared with the preceding quarter, and a drop of 39% compared with the corresponding quarter of the previous year. Yet its guidance for the April quarter was for a similar figure, as its orders backlog already covers 65% of the revenue forecast.
The guidance was a pleasant surprise, since most analysts expected another quarter of falling revenue, while at Credit Suisse they believe that with revenue 40% below its peak of the summer of 2008, the company will stabilize.
With the help of advanced cost cutting processes, Marvell succeeded in reporting earnings per share of $0.05, while the consensus estimate had been for $0.01. 850 employees, representing 15% of Marvell's workforce, will lose their jobs under the current cost-cutting plan, which already began in the previous quarter, and will save the company $100 million in operating expenses per year.
75% of the drop in revenue in the quarter ended January compared with the earlier forecast before its warning, was caused by the low point reached in the computer sector, primarily hard disk drives. Chips for the consumer wireless products sector were responsible for 15% of the drop, and cellular devices only accounted for 10% of the drop.
Citigroup analysts, led by Glenn Young, share the general assessment that the chip sector has hit bottom. Young recently returned from a visit to Taiwan, a country considered the world center for the sector. The analysts say that demand is not as bad as thought, and that the process of canceling orders bottomed out last November, and that sales hit bottom in January or February. They believe that second quarter production will be higher than the first quarter, the first time in a long time that has happened.
The analysts say that in the cellular device sector, they find that the food chain in the current quarter is less bad than they thought, due to low inventories, and because the large cellular device makers in the U.S., Europe, and Korea are building new models. Additionally, demand from China for cellular devices is strengthening, with the end of their New Year vacations.
On the other hand, the analysts point out that the encouraging figures are for very cheap handsets, and for very expensive handsets. Those in between are still suffering from low demand.
In the computer sector, Taiwanese sub-contractors that produce notebooks and new models of netbooks for Hewlett Packard (NYSE: HPQ), Dell (Nasdaq: DELL), and others, are talking about a rise in sales in the second quarter of up to 15% compared with the first quarter, the quarter which will mark the bottom.
Those figures appear to Citigroup's analysts to be too optimistic, but they do lead them to reiterate their view that Intel (Nasdaq: INTC) will meet the market's forecasts, not just in terms of first quarter, but also second quarter, revenue, each of which is for around $6.9 billion, which is a 28% decrease year on year. In general, they point out that chip companies will produce mixed results for the first quarter, with some beating estimates and some missing them. That is an improvement over the fourth quarter, when chip companies across the board missed.
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