Anxiety grows about chip outlook
By Bolaji Ojo
EBN
(03/09/01 15:17 p.m. PST)
NEW YORK -- Barely halfway into what many industry forecasts projected would be a four-year expansion, semiconductor companies are staring at the possibility of a long downturn and wondering when the market will swing up again.
This week, several top chip makers, including No. 1 microprocessor supplier Intel Corp., further muddied the waters by announcing sharp declines in first-quarter sales. Their announcements helped douse expectations that a turnaround was possible within the next two quarters.
“I don't see any sign of recovery yet,” said Andy Bryant, Intel's chief financial officer. “Nothing gives a lot of hope yet.”
Some observers are still clinging to the belief that the electronics industry will begin to see a steady uptick in sales by the end of the second quarter, although that group is dwindling fast. By the end of this week, a number of industry executives, citing poor demand visibility, were declining to provide sales forecasts.
“We don't have the visibility to be able to predict when this softness will abate,” said Henry T. Nicholas III, Broadcom Corp.'s president and chief executive, in a statement.
There's no doubt that the electronics industry is witnessing a major revenue erosion that could hurt margins and profits and propel the industry into an unforeseen funk. To some industry observers, the current inventory overload at distributors, EMS providers, and OEMs means expectations of an immediate upswing may be unrealistic.
“We're in an environment of a meaningful year-over-year revenue decline and a significant reduction in end-market demand,” said Eric Gomberg, an analyst at Thomas Weisel Partners LLC, New York. “The component companies might not bottom out until the back half of this year.”
Despite the pessimism, some industry watchers still hope the market -- and the U.S. economy as a whole -- will recover by August. For the electronics sector at least, this will depend on how suppliers and OEMs deal with their inventory problems.
Any lingering debate as to whether the electronics industry can engineer a soft landing vanished in the wake of December's rude jolt. Most of the companies that have pre-announced first-quarter results are expecting double-digit sales declines.
National Semiconductor Corp., for instance, said sales will be down 10%, while Broadcom is expected to slip by 14%, Xilinx by 15%, and Altera 20%. PC-reliant Intel and communications chip maker LSI Logic Corp. are bracing for respective sales declines of 25% and 30%.
“[LSI Logic chairman and chief executive] Wilfred Corrigan says he doesn't know anyone going through a soft landing,” said a spokesman for the Milpitas, Calif., company. “You can't sugarcoat that.”
Even when the industry does pick up again, there are indications component suppliers may pay a price for the production capacity they added last year. As supply agreements signed with vendors last year come up for renewal, OEMs will be insisting on more favorable terms, which will depress average selling prices and extend chip makers' suffering, analysts said.
“The more prices were inflated and lead times stretched last year, the greater the likelihood of a sharp decline in ASPs,” Thomas Weisel's Gomberg said. “The higher the mountain these OEMs were forced to climb, the greater the drop for ASPs.”
This week's spate of negative news indicates that revenue and profits in the electronics sector will be under pressure for several months.
Intel, the world's largest semiconductor maker, now expects first-quarter revenue to be about $6.53 billion, down from $8.7 billion in the fourth quarter of 2000. The company said it will lay off 5,000 employees, or 5% of its workforce, and trim R&D expenses, although it's not expected to cut into its $7.5 billion capital improvement budget.
More shocking to analysts and industry watchers was Intel's statement that its gross margin will drop to about 51% from a prior estimate of 58%, which is down from 63% in the fourth quarter.
“I was shocked by the size of the margin decline,” said Drew Peck, an analyst at SG Cowen Securities Corp., Boston. “It is unprecedented. We may be looking at a 12-month recession.”
Intel is not alone. Other semiconductor suppliers now expect their gross margins to fall as much as five percentage points in the current quarter due to what analysts say is overcapacity. Indeed, capacity utilization rates are dropping sharply, further pressuring suppliers' margins.
National Semiconductor, for example, said its three wafer plants operated at 59% of capacity in its fiscal third quarter, ended Feb. 25. That rate will decline further, to between 50% and 55%, in the current quarter, according to Don Macleod, chief financial officer of the Santa Clara, Calif., company.
“We're rationalizing production and that is typical of the industry,” he said.
Analysts expect any uptick in demand to be limited to OEMs initially because of the components stockpiled in the supply chain. As end-market demand picks up, OEMs' sales will rise, while suppliers must wait for inventory levels to fall before upping production.
“While Cisco and Nortel may resume growth over the summer, the companies that supply components may not see substantial new orders for some time,” Thomas Weisel's Gomberg said. "The big question is when will inventory be worked through."
It appears some companies are beginning to experience a slow reversal of the sharp OEM order cancellation and rescheduling that precipitated the current crisis at components suppliers.
National Semiconductor said product cancellations peaked in December and have since slowed considerably, while orders for delivery during the same quarter picked up in February.
The greatest headache facing the components market remains the lack of visibility into customer demand. “We don't have the visibility now to say when we'll see strong growth again, and we obviously doubt that anyone does,” the LSI Logic spokesman said. “For those who are saying second quarter, we hope they're right.” |
