Slim Hopes Remain for Q3 Upturn
semi.org
semi.org
September 2001 Vol. 2, No. 9
Slim Hopes Remain for Q3 Upturn
PC chip price wars may delay rebound
by Allan Richter
Price wars for PC chips are looming, and industry performance is far too sluggish to portend a full recovery anytime soon. Yet some analysts who track semiconductor equipment and device makers appear confident that the industry bottom that they've been hoping for may be in sight. If they're right, the industry may see the start of a second-half recovery after all, though second-quarter results did not support that prospect.
What is more certain is that it will be at least a couple of years before suppliers can fully overcome the depth of the downturn. Continued volatility among semiconductor stocks and conflicting equity research on the food chain's health underscored the sector's limited visibility. A two-week rally by semiconductor stocks in late July, fueled in part by upbeat Merrill Lynch reports, was dampened by the prospect that a price war between Intel and AMD would overrun the rest of the industry.
Nonetheless, many companies that are optimistic about a nearer-term bottoming of fundamentals, including analysts who cover some of the larger pure-play foundries, have placed their bets that a turnaround would begin during the current quarter.
A SEMI survey showed that more than 20 percent of its members believed orders would trough in the third quarter, though that was the third most popular scenario. The survey, released at SEMICON West, showed that nearly 40 percent of respondents believed they would see bottom in the fourth quarter, and about 35 percent did not believe orders would hit bottom this year (see www.semi.org/web/wmktstats.nsf for further information).
SEMI showed encouraging data indicating that orders for capital equipment worldwide appeared to be leveling off to early 1999 levels. But it was too soon to tell if the data marked a new pattern or was an anomaly. In the longer term, semiconductor equipment billings will not outpace last year's $47.7 billion until 2004, when they will reach $53 billion, according to SEMI's mid-year forecast.
Optimists cited the recent orders data as support for their forecasts that a recovery is near. "Because orders are no longer collapsing, we can be pretty sure that inventories are nearly reduced to normal levels relative to normal end-market sales. Inventories don't need to be depleted before a recovery starts, just reduced," reasoned Thomas Kurlak, a retired Merrill Lynch semiconductor analyst, writing early in the current quarter in TheStreet.com.
But Jim Seymour, president of Sey-mour Group, an information strategies consulting firm, said visibility is just too limited. In a piece headlined "You Can't Put Lipstick on These Semiconductor Pigs," also early this quarter in TheStreet.com, Seymour observed that any estimates from company executives are "over an incredibly wide range and wrapped in deliberately spoken ambiguity."
Seymour cited the "$600 million range" given by Intel CFO Andy Bryan in his estimate of the chip giant's third-quarter earnings. Seymour was among several industry and Wall Street analysts to poke holes in Intel's plan to help revive the PC sector.
"Intel thinks it may get better in the Christmas quarter and, in fact, is cutting margins by chopping Pentium 4 prices early and deeply to promote that recovery," he said. "But that sounds like the old retailers' line about losing money on every sale, but making it up on the volume."
Lehman Brothers analyst Dan Niles and Salomon Smith Barney's Jonathan Joseph both viewed the looming price wars unfavorably. Joseph, who accurately called the downturn before it took hold last year, had put out more positive signals in April.
Cutting its ratings on a number of chip industry companies last month, Credit Suisse First Boston revised its estimate for this year's personal computer shipments downward, saying shipments would not be flat as forecast earlier but would decline. "The current downturn is more unlike than like any preceding downturn," Credit Suisse said in a research note. "Current conditions are a function of both oversupply and underdemand."
Credit Suisse cut its rating on the semiconductor capital equipment industry to "market underweight" from "neutral" or "market weight," saying that the sector has not seen the bottom in terms of fundamentals. It added that the capital equipment industry is probably not within 20 percent of a bottom.
The brokerage cut several equipment stocks to "hold" from "buy," including Applied Materials, KLA-Tencor, ASM Lithography, Novellus, Varian Semiconductor and ATMI Inc. Credit Suisse maintained "buy" ratings on Lam Research, DuPont Photomasks, Brooks Automation and FEI Co.
On the chip side, Credit Suisse downgraded to "hold" from "buy" Altera, Applied Micro Circuit, Atmel, ChipPac, Cypress Semiconductor, Lattice, LSI, Microchip Technology, Micrel, Maxim Integrated, Silicon Storage and STMicroelectronics.
Further dampening the PC market's prospects, the research firm International Data Corp. forecast a 24 percent drop in revenues of personal computer chip makers this year, to $38 billion from $50.3 billion in 2000. The desktop PC semiconductor market will be hardest hit, the report said, showing revenues sliding to $27.3 billion, from $38.6 billion last year.
Personal computer shipments during the second quarter fell year-over-year for the first time since 1986, IDC said, easing 2 percentage points to around 30 million units shipped. Shipments to Asia plunged more sharply than earlier forecast, and Europe shipments also slowed. The U.S. market fell in line with previously lowered expectations, IDC said.
The PC market would not recover until after 2005, the research firm said. Microprocessors and DRAMs were the semiconductor components that fell the sharpest, with DRAM suppliers now not breaking even on several products.
Indeed, Joseph Bronson, chief financial officer and executive vice president at Applied Materials, said at SEMICON West that price erosion in DRAM was unanticipated. But those problems were among several that did not portend well for the industry's near-term health, Bronson said, which was threatened by a potential slowdown in 300 mm equipment and lower capacity utilization than anticipated.
He also cited "significant" cutbacks in the Asia-Pacific region, and a slowdown in Japan. "And there's virtually no capacity investment being made for 200 mm," he added. "The only thing I didn't do today was wear my black shirt and black tie."
Still, Merrill Lynch managed to sound several optimistic notes this quarter, observing in research reports that "the worst of the downturn is behind us." The brokerage last month also upgraded ratings on the three largest pure-play foundries because of low valuations and signs that fundamentals could bottom late in the third quarter.
Merrill Lynch analyst Dan Heyler said he raised Taiwan Semiconductor Manufacturing Corp. and United Microelectronics Corp. to "buy" from "accumulate," and Chartered Semiconductor Manufacturing to "accumulate" from "neutral."
Despite the Merrill Lynch report that singled out foundries as an area with upside potential, Chartered, as well as sister company ST Assembly Test Services, are not likely to see a recovery soon, analysts say.
The problem is that Charter and ST Assembly are too rooted in communications and networking markets, which are not expected to recover until next year, according to analysts who track Singapore-based Chartered, the world's third largest pure-play foundry. Communications products account for nearly half of Chartered's business and nearly two-thirds of ST Assembly's.
Chartered widened its $30.9 million loss in the first quarter to a $107.6 million loss in the second quarter. ST Assembly reported a $31.7 million loss for the second quarter ended June 30, compared with a $22.9 million loss in the previous quarter.
Like Chartered and ST Assembly, Taiwan pure-play foundry United Microelectronics Corp., also stung by its exposure to frail communications segments, warned of a wider loss in the third quarter. UMC posted a $53 million loss in the second quarter ended June 30, compared with $188 million in net income in the quarter ended March 31.
UMC Chairman Robert Tsao told an investor conference the company expected third quarter sales to sink as much as another 20 percent from the second quarter. UMC reported $436 million in second-quarter sales, down from $685 million in the first quarter. But the company expects a rebound in the final quarter of this year.
On the upside, UMC said it would not whittle its 2001 capital expenses budget, holding steady at $1.5 billion, a sign of its commitment to the 300 mm transition.
In contrast to the warnings from its foundry rivals about wider losses in the third quarter, foundry giant Taiwan Semiconductor Manufacturing Co. said its sales had already hit bottom and that third-quarter net income should show a slight improvement over the $9 million it posted for the second quarter.
But Europe's semiconductor and chip equipment suppliers said they saw little chance of a recovery this year.
"Visibility for market development in the second half of calendar year 2001 remains low, and there are no clear signs of market recovery in the coming months," Ulrich Schumacher, Infineon Technologies' chief executive, said in a statement. Infineon reported a $523.2 million operating loss in its June quarter. Similarly, ASM International, the Dutch equipment maker, said it expected growth to resume next year, and that it would post a loss in the current quarter.
But STMicroelectronics made a relatively strong showing, according to a report from IC Insights, the Scottsdale, Ariz., research firm, which observed in a report early this quarter that the European chip maker leapt from seventh to fifth place among the top 10 global semiconductor suppliers. The reason: its sales slid the least of the top 10 in the first half of the year.
Bill McClean, IC Insights' president, said STMicroelectronics managed to move up in rank because of its product and geographic market diversity. The chip supplier's sales to automotive and industrial applications, which haven't seen the deep cuts endured by computer and telecommunications markets, helped cushion it, McClean said. "They have a pretty good worldwide sales base," he said.
Nor does weakness in the European semiconductor industry deflate the argument that a recovery is near, observed WR Hambrecht & Co. in a report last month.
"Many of our companies indicated that North American business has stabilized, while Europe is still weakening heading into the summer," WR Hambrecht analysts said. "We believe, just as North America led the international markets into the current slowdown, that North America will again lead the international markets to a recovery, starting in the December quarter."
The equity research firm said it expected wireline communications to help boost the industry, and that the semiconductor food chain companies that it tracks all reported inventory reductions. The brokerage follows Altera, Xilinx, Broadcom, Applied Micro Circuits, Vitesse, Marvell Technologies, PMC Sierra and TranSwitch.
About the Author
Allan Richter is managing editor of Semiconductor Magazine and may be reached at arichter@semi.org. |
