Chip Makers Expected to Meet Revised 2nd Quarter Views Despite Poor Business
Dow Jones Newswires
NEW YORK -- Even though a pickup in semiconductor business during the June quarter didn't materialize, as many had hoped, most U.S. chip makers are expected to meet Wall Street's earnings expectations, which have been lowered significantly.
"We are starting to see companies take a much harder look at their business because it's not going to have a quick bottom and recovery over the course of the summer," said Merrill Lynch & Co. analyst Joseph Osha. "To the extent we got a pick-up in June, it was pretty lackluster."
Indeed, semiconductor companies re-examined their forecasts during the June quarter, which sparked a series of earnings preannouncements. In the span of two weeks last month, chip makers PMC-Sierra Inc. (PMCS), Vitesse Semiconductor Corp. (VTSS), Applied Micro Circuits Corp. (AMCC), TranSwitch Corp. (TXCC), Altera Corp. (ALTR) and Xilinx Inc. (XLNX) all issued warnings.
The major issues plaguing semiconductor companies this quarter were " fundamentals that continued to deteriorate, demand which continued to slow, and the veracity of the inventory problems, which became more obvious," said Mark Edelstone, an analyst at Morgan Stanley Dean Witter.
While Edelstone does expect a chip recovery in the fourth quarter, he said it will be modest because it will be associated with pricing pressure across the board in the semiconductor industry.
Doom and gloom were indeed the common theme during the June quarter, but it did mark the first time in awhile that Intel Corp. (INTC) didn't have to cut its financial targets.
Mr. Edelstone, who is calling for the chip giant to post earnings of nine cents a share and revenue of $6.25 billion, said he thinks Intel will meet its targets for the second quarter when it reports July 17, but more important will be its outlook going forward.
"A big concern will be margins for Intel," Mr. Edelstone said. Revenue growth in the third quarter will be offset by margin pressure fueled in part by declining prices for chips and Intel's transition to the Pentium 4 and new manufacturing processes, he said. Margins will improve, he noted, but not until the second half of 2002.
Mr. Osha, the Merrill analyst, agreed Intel is likely to be in line with Wall Street estimates, although there is a chance the chip maker could miss. "Intel can always make a quarter by pulling stuff in," he said. "But they can't borrow from Peter to pay Paul forever."
Mr. Osha, who is calling for Intel to post earnings of 11 cents a share and revenue of $6.48 billion said there are some questions as to how business in the third quarter will track. He said that pricing will be challenging for Intel.
Analysts surveyed by Thomson Financial/First Call expect Intel to report earnings of 11 cents a share and revenue of $6.3 billion for the second quarter. For the year-ago second quarter, Intel reported earnings of 50 cents a share and revenue of $8.3 billion.
While Intel will likely meet expectations, its archrival Advanced Micro Devices Inc. (AMD) may not.
Mr. Osha said there is a chance that AMD will miss both on the EPS and revenue side. Osha, who expects the company to post earnings of 22 cents a share on sales of $1.04 billion for its second quarter, said the chip maker will suffer from weak demand.
Mr. Edelstone, the Morgan Stanley analyst, said AMD could meet his earnings estimates, but those targets are substantially lower than the Wall Street consensus. He noted that price declines in microprocessors and flash memory will put pressure on both revenue and gross margins.
Mr. Edelstone is calling for AMD to weigh in with earnings of 20 cents a share and sales of $1.08 billion. The consensus estimate of analysts surveyed by First Call has the Sunnyvale, Calif., chip maker posting earnings of 27 cents a share for its second quarter and revenue of $1.09 billion. In the year-earlier second quarter, Advanced Micro Devices had earnings of 61 cents a share and revenue of $1.17 billion. The company reports second-quarter earnings July 12. Communications-Chip Makers Hurt By Low 'Turns' Business
In the communications chip market, the major theme during the June quarter was the absence of turns business -- the number of customer orders booked and shipped within the same quarter.
"A lot of companies were depending on turns business this quarter," said Sandy Harrison, an analyst at Pacific Growth Equities. "Companies were thinking that inventories would be reduced and therefore they would start to see orders."
Since TranSwitch, Applied Micro Circuits, and PMC-Sierra, among others, preannounced late last month, Mr. Harrison said those companies should meet their revised financial targets. He noted that forecasts for upcoming quarters will be important because the companies didn't provide any guidance when they lowered their expectations.
Mr. Harrison is calling for PMC-Sierra to report a loss of eight cents a share and revenue of $94 million. The First Call consensus estimate has the chip company posting a loss of seven cents a share for its second quarter and revenue of $93.67 million. In the year-ago second quarter PMC-Sierra posted earnings of 23 cents a share and revenue of $134.10 million.
In the case of Texas Instruments Inc. (TXN), which has felt the continued pain of an inventory correction in the wireless and wireline communications business this quarter, analysts still expect it to meet expectations.
"Its been a tough quarter for TI," said Mr. Edelstone of Morgan Stanley. " They'll do the guidance (for the June quarter), but the third quarter will end up being another pretty weak quarter."
Mr. Edelstone has TI posting earnings of two cents a share and revenue of $ 2.02 billion, compared with the First Call consensus for earnings of 2 cents a share for its second quarter and revenue of $1.93 billion. In the year-earlier period, the company reported earnings of 31 cents a share and revenue of $2.84 billion.
Merrill's Mr. Osha, who expects TI to report earnings of three cents a share on revenue of $2.06 billion, said the trick for the Dallas-based chip maker is to get its analog business "right."
With all the woes in the chip industry, it's no surprise that semiconductor capital equipment companies also felt pain in the just-ended quarter. Weak capital spending patterns put pressure on the group and even forced some companies to preannounce.
The semiconductor capital equipment industry experienced a "very fast contraction" with foundries cutting spending as well as chip makers, said Susan Billat, an analyst at Robertson Stephens.
Although Applied Materials' quarter doesn't end until July -- a slow month for the company -- Ms. Billat expects the company to meet expectations. She is calling for Applied Materials to post fiscal third-quarter earnings of 4 cents a share and revenue of $1.28 billion.
The First Call consensus has Applied Materials earning two cents a share and revenue of $1.25 billion. In the year-ago fiscal third quarter, Applied Materials earned 70 cents a share on revenue of $2.73 billion.
As for Novellus Systems Inc. (NVLS), which at the end of May reaffirmed its forecasts for the second quarter, Lehman Brothers analyst Edward White said he expects the company to meet its targets.
Mr. White thinks Novellus will post earnings of 40 cents a share and revenue of $379 million. A First Call survey calls for Novellus to post earnings of 39 cents a share for its second quarter and revenue of $372 million. In the year- ago second quarter, Novellus reported earnings of 56 cents a share and revenue of $326 million.
"Novellus is in a better position than most semiconductor capital equipment companies," said Robertson Stephens' Ms. Billat. "It is well-positioned in the two areas that there is still buying -- copper and 300 millimeter."
Ms. Billat, who said Novellus will outperform the industry, expects Novellus to post earnings of 40 cents a share and revenue of $379 million.
Write to Donna Fuscaldo at donna.fuscaldo@dowjones.com
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