U.S. Chipmakers Profits Hurt by PC Prices: Industry Outlook
U.S. Chipmakers Profits Hurt by PC Prices: Industry Outlook
San Francisco, June 21 (Bloomberg) -- Intel Corp. and rival chipmakers that supply the personal-computer industry spent the second quarter struggling with falling PC prices.
Not so for Broadcom Corp. and makers of semiconductors that run communications equipment. Their sales and earnings are booming and show no sign of letting up as companies buy more equipment to speed up telecommunications networks. ''Anything tied to the PC is lagging,'' said Bill Schaff, chief investment officer at Bay Isle Financial, which has $500 million under management and owns shares of Intel, Broadcom and Texas Instruments Inc. ''The communications side is the hot market.''
Intel cautioned in April that sales will drop slightly from the first quarter's $7.1 billion. Now some analysts say profit at the world's largest chipmaker may just match, or even miss, the average second-quarter forecast of 53 cents a share from First Call Corp. Profit a year earlier was 33 cents on sales of $5.93 billion.
Mark Edelstone at Morgan Stanley Dean Witter & Co. Friday reduced his prediction for 1999 earnings to $2.25 a share from $2.35 and cut his rating to ''outperform'' from ''strong buy.'' Charlie Glavin at Credit Suisse First Boston Thursday reduced his forecast to $2.25 from $2.32.
Prices Falling
Intel is selling more of its less-profitable Celeron chips for low-priced PCs, and demand for its new Pentium III has been weaker than expected. The combination of lower-priced chips and slower sales of more profitable ones has cut the average prices for Intel's products, some analysts said.
Intel's prices could take a further hit because of a delay of at least two months in introducing the newest version of the Pentium III, the top-of-the-line processor for PCs, Edelstone said. ''(Average prices) are coming down because the mix is shifting toward lower-end products,'' said analyst Joe Osha of Merrill Lynch & Co.
Osha estimates Intel's average selling price will fall 3 percent from the first quarter, and Celeron prices are expected to fall 10 percent.
PC prices are plummeting as component costs come down and the lure of the Internet spurs consumers to buy cheap PCs for their homes.
The average retail price of a PC in April fell 6 percent to $928 from $987 in March, according to PC Data Corp. Sub-$1,000 machines accounted for 71 percent of retail sales in April.
Dell Computer Corp. last week jumped into the market with its first machine well below $1,000, the $899 Dimension L. Compaq Computer Corp., the No. 1 PC maker, introduced a $599 PC without a monitor, and emachines Inc. is selling systems for as little as $499.
Shares Down
The falling PC prices are reflected in the share prices of chipmakers.
Santa Clara, California-based Intel has dropped by almost a quarter from its all-time high of 71 27/32 on Jan. 20. Advanced Micro Devices Inc., whose chips compete against Intel's, has lost more than two-fifths of its value since January.
By contrast, PMC-Sierra Inc., which makes chips used in equipment for sending data across fiber-optic networks at high speeds, has gained 89 percent since the beginning of the year. Broadcom, which makes chips used in telecommunications networks, has soared 88 percent.
AMD and Intel have been locked in a pricing battle since February, when Intel accelerated price cuts on its Celerons to regain lost market share. Intel also moved up the introduction of faster chips to foil AMD. The company acted to stem a decline in its market share, which dropped to 80 percent in 1998 from 86 percent in 1997, according to International Data Corp.
Market Share
So far, the strategy is working. Intel's share of the retail market is ticking back up, rising to 53.2 percent in April from 52.5 percent in March. Celerons accounted for 30 percent of PCs costing less than $1,000, up from 17.5 percent in March, according to Ziff-Davis Inc. research unit ZD Market Intelligence.
Some analysts, including Merrill's Osha, said Intel will meet earnings expectations while selling more Celerons because it's been aggressive in cutting costs on the chips with cheaper packaging, the plastic and wires that connect the chip to the rest of the PC. ''They have left themselves a lot of room to increase margins on that part,'' said Osha, who rates Intel ''near-term accumulate.''
AMD isn't faring as well. The Sunnyvale, California-based company is expected to have a second-quarter loss of 40 cents a share, according to First Call Corp. AMD's loss a year ago was $64.6 million, or 45 cents, on sales of $526.5 million.
AMD is being hammered by Intel's price cuts as well as its own production problems, which have hampered its ability to make enough of its high-speed processors.
Micron Technology Inc., whose memory chips are used to store data in PCs, is expected to break even for its fiscal third quarter that ended in May after four quarters of losses, according to First Call. Memory-chip prices have become more stable, though they continue to fall as costs come down.
Boise, Idaho-based Micron has lost more than 40 percent of its value since February amid concern about sluggish PC demand and falling prices.
Networking Sizzles
It's a different story for chipmakers specializing in networking and telecommunications. As PC use proliferates and companies look to the Internet to reduce the cost of doing business, they need to find faster methods of moving data.
Broadcom last month unveiled a networking chip that sends information 10 times faster over copper-wire lines. It said Cisco Systems Inc. and Nortel Networks Corp., among the biggest makers of equipment for computer and phone networks, are designing products for it.
Conexant
Conexant Systems Inc., spun off from Rockwell International Corp. in December, has said strong demand will boost earnings above expectations. CS First Boston analyst Charlie Glavin said the company could beat even its new predictions of 15 percent growth.
The company's chips for remote-access equipment, used to receive Internet phone calls, are in demand from Cisco and rival Ascend Communications Inc.
PMC-Sierra is doing well with its products used in the powerful asynchronous transfer mode, or ATM, switches that Ascend and others sell to phone companies. Glavin said the chipmaker ''should exceed expectations'' for earnings of 19 cents a share.
Other communications chipmakers are riding the communications boom.
Digital signal processors, which translate heat, light and sound into the zeros and ones of digital chips, are the industry's fastest-growing product line, the Semiconductor Industry Association said. In 1998, sales in the DSP market were $3.5 billion. That's expected to increase 26 percent in 1999 to $4.4 billion.
Dallas-based Texas Instruments is benefiting from the demand. Earnings at TI, which controls more than 45 percent of the DSP market, are expected to soar to 83 cents a share from 35 cents before a gain and a charge last year. ''There's upside potential for TI,'' said First Boston's Glavin. He said sales of chips used in computer modems are doing better than expected.
Motorola Inc., the world's No. 2 maker of mobile phones and third-largest chipmaker, will benefit from improving sales of phones and a recovery in the chip business as demand picks up.
Motorola, based in Schaumburg, Illinois, is expected to earn 41 cents a share, up from a penny a share in the year-ago period. Company 2nd-Qtr Year-Ago Number of
Estimate EPS Analysts Intel $0.53 $0.33 31 AMD (0.40) (0.45) 19 Texas Instruments 0.83 0.35 21 Micron Technology* 0.00 (0.50) 21 PMC-Sierra 0.19 0.15 18 Conexant+ 0.19 --- 12 Broadcom 0.16 0.08 4 Motorola 0.41 0.01 27 National Semi~ (0.15) (0.63) 19 *Fiscal third quarter ended in May. +Fiscal third quarter ending in June. Company was spun off from Rockwell in December; no year- ago numbers available. ~Fiscal first quarter ending in August. All estimates from First Call Corp.
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