Chip outlook expected to get worse before it gets better
BY THERESE POLETTI
Mercury News
It's going to be a long, slow summer for the semiconductor industry.
That is the view of many Wall Street and industry analysts these days. They believe that things will get worse before they get better as Silicon Valley's crucial chip industry slogs through one of its ``steepest and sharpest'' industry downturns ever.
Altera warned investors Thursday that its second-quarter revenue will be down 25 percent from the first quarter. Previously, the San Jose developer of communications chips had said it expected revenue to drop 20 percent.
Wall Street is bracing for more bad news over the next week, as major chip companies start to give mid-quarter financial updates to investors. Next Thursday, all eyes will be on chip behemoth Intel, when it hosts its first-ever mid-quarter conference call with analysts. Many analysts believe Intel will warn of further disappointments in its sales and profit for the second quarter.
``Absolutely, I think they will lower expectations,'' said Mark Edelstone, a Morgan Stanley Dean Witter analyst. In mid-April, Intel gave a broad range of financial estimates for the second quarter, with revenue projected to rise as much as 2 percent or drop as much as 6 percent from first-quarter levels. ``I think they will lop off the top end of it. They will take growth off the table,'' Edelstone said.
Earnings guidance
Tom Beermann, a spokesman for Santa Clara-based Intel, said it is too soon to tell if Intel will change its guidance. ``We don't know until really the last minute in terms of collecting information,'' Beermann said. He said Intel is hosting the formal mid-quarter update to provide current financial information to all investors simultaneously, in compliance with new disclosure regulations.
On the positive front, Novellus, a chip-equipment maker in San Jose, said Thursday that its second-quarter
earnings would be 40 cents a share, a penny better than analysts' estimates. Novellus said orders are on target to reach $1 billion this year, but cautioned that if it doesn't see any increase in demand, it may revise that figure.
Edelstone was one of a panel of analysts who discussed the gloomy state of the semiconductor industry
Wednesday night at the Churchill Club in Palo Alto. The panel, which included Dan Niles of Lehman Brothers and Drew Peck of SG Cowen, pretty much agreed that the industry is still mired in an economic downturn and no immediate relief is in sight.
`Brutal summer'
``We are going to have a long, brutal summer,'' Niles said, adding that buying semiconductor stocks right now is a huge mistake because they haven't hit bottom yet. He said that while the personal-computer industry isn't overstocked on inventory, there's not much customer demand. In the communications sector, things are even worse: Equipment makers bought too many chips even as telecommunications companies, Internet service providers and cell-phone makers stopped spending.
``Lots of companies are going to have more layoffs,'' Niles predicted.
Peck tried to lighten up the rather morose audience by joking about the glut of communications equipment and the great excesses of 2000. He likened Cisco's recent enormous $2.5 billion write-off of communications chips and components to another monument of excess, the opulent Bellagio Hotel in Las Vegas. Cisco's write-off is equal to building 2.3 Bellagios, he said.
Throughout this year, financial forecasts for both the industry and individual companies have continued to fall. The Semiconductor Industry Association (SIA) will host a lunch next week in Redwood City to disclose its mid-year forecast, one that will likely give its participants indigestion. In early November, before the U.S. economy went into a tailspin, the SIA projected revenue growth of 22 percent for the chip business this year.
That forecast is definitely coming down, said Molly Marr, an SIA spokeswoman.
Revenue drop
Edelstone is looking for total industry revenue to drop 20 percent to 22 percent this year, down from a peak of $205 billion last year. Pathfinder Research, a semiconductor market-research firm in San Jose, said it is now looking for total industry revenue to fall 15 percent to 20 percent.
``The second quarter is going to be worse than expected, and the third quarter is not going to come up,'' said Fred Zieber, president of Pathfinder in San Jose. ``There is word out of Taiwain that motherboard shipments are weak. With the economic problems and the slowdown in Europe, it's quite possible that the PC market is weaker than expected.''
Intel, which develops 80 percent of the microprocessors in the world's PCs, is also seeing a slower take-off of its new Pentium 4 family. Eric Ross, an analyst with Thomas Weisel, said he now expects Intel to sell 10 million Pentium 4 chips this year, half of what Intel said last quarter that it expected to sell. ``The Pentium 4 is way behind schedule,'' Ross said.
Ashok Kumar, an analyst with US Bancorp Piper Jaffray, said the industry seems to be in the flat portion of a U-shaped bottom. ``Hopefully, we won't continue setting new low watermarks every quarter.'' |
