07:27am EST 8-Feb-02 UBS Warburg (US) (Thornhill III, Thomas A. +1 415 35) AMD
Semiconductors: End Market Trends: Orders Up, Inventory Down (Part 1 of 2)
UBS Warburg LLC February 8, 2002
Thomas Thornhill III
(+1 415 352 5667) tom.thornhill@ubsw.com
Calvin Lee, Associate Analyst
(+1 212 713 8631) calvin.lee@ubsw.com
Richard Shannon, Associate Analyst
(+1 415 352-5674) richard.shannon@ubsw.com
United States
Semiconductors
Semiconductors: End Market Trends: Orders Up, Inventory Down
Inventory liquidation sets the stage for future component demand
The Department of Commerce released its monthly Preliminary Report on Durable
Goods on February 5 for the month of December. Inventories continued to trend
down, across the three categories that we track: semiconductors, computing and
communications equipment segments. On a three-month rolling basis, orders were
up and shipments increased for computing and communications, but semiconductor
shipments declined from November. Shipments of computing equipment showed the
strongest recovery, with 8%+ increase since October.
Athough backward looking, the data does show, on an aggregate basis, that
inventories continue to trend downward while new orders and shipments are
modestly improving. While 1Q02 visibility is limited, the significant reduction
in computing and communincation equipment inventory is encouraging.
Our UBS Warburg Semiconductor Leading Indicator (SLI) was up for the second
consecutive month, following a U-shape bottom that lasted for most of 2001.
This move in the SLI signals a turn in semiconductor fundamentals should follow
in six to nine months, consistent with our second half-2002 recovery thesis.
Highlights
* Inventory Down. December Inventories continued to trend down, across the
three categories that we track: semiconductors, computing and communications
equipment segments. Inventories in computing equipment hit a ten year low
while inventory in the communication equipment sector declined to the levels
of 1995.
* End-market Shipments Up. December Shipments increased modestly for
communications (+5.8%) and computing equipment (+5.7%), while semiconductor
shipments declined slightly (2.6%) on a three-month rolling basis.
* End-market Orders Up. Orders accelerated for communications (+15.5%) and
computing equipment (+9.1%), but retracted for semiconductors (6.3%).
* SLI Up. Our UBS Warburg propriety Semiconductor Leading Indicator was up for
the second consecutive month. Our SLI leads global semiconductor sales (SIA
IC shipments) by roughly six to nine months based on a turn in end-market
orders and reduced inventory.
With the earnings season for many technology-related companies behind us, the
Department of Commerce data are for the most part backwards looking. However,
we think it is useful for investors to look at the aggregate data as a resource
to evaluate broader industry trends across the different segments of the
technology food chain.
Department of Commerce Data Summary at a Glance:
Table 1: Department of Commerce Data
Source: U.S. Dept. of Commerce and UBS Warburg LLC
Key Takeaways:
* Computing inventories on secular downward trend, starting back in 1995.
* Communications equipment new orders increased, but this segment is typically
back-end loaded.
* Computing equipment orders and shipments were up, both MoM and QoQ,
consistent with results reported by companies such as Intel and AMD.
* We are encouraged by the sharp re-acceleration in sales and new orders in the
computing equipment segment. We believe the strong order and shipment rate
will spill over to 1Q02. We believe that 1Q02 results will be slightly better
than the generally weaker first quarter of the year.
Semiconductor Leading Indicator (SLI - UBS Warburg)
Exhibit 1: UBS Warburg Semiconductor Leading Indicator
Source: UBS Warburg LLC
Our UBS Warburg proprietary Semiconductor Leading Indicator (SLI) was up for
the second consecutive month, after languishing in an extended trough for most
of 2001. The shape of the SLI seemed to mimic the much-discussed U-shape
bottom. Historically the SLI leads SIA global IC shipments by roughly six to
nine months. The SLI has roughly a correlation coefficient of 0.80 with the
SIA IC shipments with a nine-month lead. This is consistent with our investment
thesis regarding a second half 2002 recovery, lead by a PC replacement cycle,
and expanding into a broader semiconductor recovery that should extend through
2003.
The real question here is the shape of the re-acceleration, which, we believe,
will be modest in 2002. We forecast global semiconductor revenue growth to be
in the range of flat to +5% in 2002, with accelerated quarter-on-quarter
sequential growth during 2H02. This will create strong double-digit year over
year growth rates in the second half of 2002.
The SLI is constructed to anticipate turning points in the fundamentals that
impact semiconductor demand. Based on roughly 20 years of history the SLI has
roughly a correlation coefficient of 0.80 with the SIA IC shipments with a
nine-month lead.
Semiconductors
Exibit 2: DoC Semiconductor Inventories, Billings and Bookings
Source: U.S. Dept. of Commerce and UBS Warburg LLC
Semiconductor: Inventories
Semiconductor inventories continue to decline month-on-month for the eighth
consecutive month. December inventories decreased roughly $150 million or 2% to
$7.2 billion. Recent semiconductor inventories peaked at about $8.7 billion
during April 2001. The current inventory level is roughly equal to the level
during 2Q00. For the December quarter, semiconductor inventories declined 6% to
$7.3 billion from $7.8 billion in the prior quarter. This is the second
consecutive quarter that semiconductor inventories declined quarter-on-quarter.
In 2001, semiconductor inventories increased roughly 10% to $8.0 billion from
$7.3 billion in 2000, due to inventory growth during 1H01.
Semiconductor: Shipments
On a three-month rolling basis, semiconductor shipments decreased roughly 2.6%
in December to $6.4 billion, following two consecutive month-on-month increases
starting in October. This is a similar shipment pattern reported by SIA.
Semiconductor shipments peaked at $10.3 billion in December 2000, followed by
three quarters of consecutive shipment declines until October 2001. For the
December quarter, shipments (about $19.3 billion) were relatively flat compared
to the September quarter. We believe the improvement is partly attributed to
increased processor shipments, higher DRAM prices, and some initial inventory
replenishment activities. In 2001, semiconductor shipment decreased roughly
14.4% year-on-year. This is different than the 32% year-on-year decrease in
semiconductor revenues reported by SIA. DoC data are based on US originated
shipments and SIA data are based on destination address shipments.
Semiconductor: New Orders
New orders for December also declined to $5.8 billion (or -6.3%) from $6.2
billion in November (on a three-month rolling basis), following month-on-month
order increases from August to October for the seasonal build cycle for
Christmas. Monthly new orders peaked at roughly $11 billion in July 2000. For
the December quarter, new orders decreased 2% sequentially to $17.5 billion
from $17.9 billion in the prior quarter. In 2001, new orders declined 33% year-
on-year to $73.9 billion from $109.8 billion in 2000, as indicative of the
worst ever semiconductor revenue decline since the early 80s.
Exhibit 3: Inventory / Sales
Source: U.S. Dept. of Commerce and UBS Warburg LLC
Looking at the ratio of sales to inventory, which we believe is a good relative
measure of aggregate inventory to a relative level of sales, the December ratio
declined slightly to 10.6. This ratio peaked in October 2000 at 16.0 and
appears to have bottomed in August 2002 at 9.7. The historical average over the
past ten years is roughly 12.6. The last time the ratio dropped to a value of
10 was during 2Q98 and before that, it was during 2Q93.
We believe that aggregate semiconductor inventory could be reaching a 'normal'
level given the current level of shipments. Increasingly, companies such as
Xilinx and Altera are seeing their shipments to systems customers approach
their customers' consumption consumption rates: shipments in (semi ICs) ~
shipments out (equipment).
Communications Equipment
Exibit 4: DoC Communications Equipment Inventories, Billings and Bookings
Source: U.S. Dept. of Commerce and UBS Warburg LLC
Communications Equipment: Inventories
Communication equipment inventories declined 16.6% month-on-month to $7.6
billion or down 40% from peak inventory level at roughly $12.8 billion in
February 2001. The current inventory level is roughly equal to that achieved
during 1Q95. For the December quarter, communication equipment inventories
declined roughly 12.8% to an average of $8.6 billion. This is the third
consecutive quarter of equipment inventory liquidation. We are encouraged by
the continuing pace of communication equipment inventory reduction. At some
point forward, we believe equipment suppliers will start replenishing IC
inventories. Anecdotal data reported by IC companies indicated equipment
companies have started buying ICs to fill depleted kit parts. We believe this
is just beginning and will contribute to modest sequential revenue growth in
semiconductor ICs during 1H02.
07:23am EST 8-Feb-02 UBS Warburg (US) (Thornhill III, Thomas A. +1 415 35) AMD
Semiconductors: End Market Trends: Orders Up, Inventory Down (Part 2 of 2)
On a three-month rolling basis, communication equipment shipments increased
modestly to $6.2 billion (+5.8% MoM) from $5.9 billion in November. Following
eight months of month-on-month shipment declines, starting January 2001,
shipments appeared to have stabilized (decelerated rate of decline) over the
past three months and ended 2001 with a slight up-tick in shipments in
December. For the December quarter, shipments increased about 4% to $18.6
billion, but still declined 38% year-on-year. Shipment trends have historically
been biased toward the down side for the March quarter (-16% quarter-on-quarter
on average), following an accelerated shipment growth in the December quarter.
In 2001, shipments decline 29% to $79 billion from $111 billion in 2000.
Communications Equipment: New orders
December month-on-month orders rose roughly 15.5% to $6.0 billion on a three-
month rolling basis. New orders re-accelerated sharply over the past three
months, after reaching a trough level of roughly $4.5 billion in September,
down 56% from the peak order level of $10.2 billion in November 2000. The last
time new orders were at this level was during 1Q97. Interestingly, this is the
strongest December MoM growth observed over the past 10 years, but was still
down 40% year-on-year for the month. For the December quarter, new orders
increased 35.1% sequentially to $18 billion, following three quarters of
consecutive quarter-on-quarter decline of greater than 20% each quarter.
Similar to communication shipments' seasonal trends, new orders of
communications equipment follow seasonal patterns, with most new orders placed
toward the latter part of the second half of the year. Average historical QoQ
new orders growth rate for the December quarter is roughly 22%, followed by an
average of 13% decline in the March quarter during the following year. In 2001,
new orders declined 40% year-on-year to $70 billion from $118 billion in 2000.
Computing
Exhibit 5: DoC Computing Equipment Inventories, Billings and Bookings
Source: U.S. Dept. of Commerce and UBS Warburg LLC
Computing Equipment: Inventories
Computing inventories reached the lowest level in the past ten years in
December. Computing equipment inventories declined 11.6% month-on-month to $2.8
billion, down 21.8% year-on-year and 28.2% from the recent peak inventory level
at roughly $3.9 billion in August 2000. Computing inventories peaked at $8.7
billion in November 1995 and have since been on a downward trajectory. For the
December quarter, computing equipment inventories declined roughly 7.3% to an
average of $3.0 billion. We believe the trend in lower computing inventory over
the past five years is due to the shorter production cycle times, a direct
result of the logistics and MRP software put in place to manage this segment of
the business. Data points from PC OEMs and processor suppliers such as Intel
and AMD also confirmed December quarter results that computing inventories were
well within manageable levels.
Computing Equipment: Shipments
On a three-month rolling basis, computing equipment shipments increased 5.7%
month-on-month to $5.6 billion from $5.3 billion, an improving growth trend
that started in November, but still declined 34% year-on-year. This is
backward looking since results from both Intel and AMD have somewhat confirmed
that computing sales in the December quarter exceeded management expectations.
For the December quarter, shipments increased 8.6% to roughly $16.8 billion,
but declined 34.2% year-on-year. This is $1.3 billion higher than the
September quarter low of $15.5 billion, a level not seen since 1H97. Data
points from motherboard manufacturers in Taiwan showing month-on-month increase
of 10%+ in January and continuing DRAM demand strength give us more conviction
that the computing segment will be slight better than a normal seasonal
decline.
Computing Equipment: New orders
New orders of computing equipment re-accelerated sharply in December. Orders
rose 9.1% to $5.7 billion on a three-month rolling basis, after reaching a
trough level of roughly $4.8 billion in September and down 33.7% from the peak
order level of $8.6 billion in October 2000. However, this is the strongest
December MoM growth observed over the since 1998. For the December quarter, new
orders increased 18.6% sequentially to $17 billion, up from $14.3 billion.
Average historical QoQ new order growth rate for the December quarter is
roughly 12.4%, followed by an average of 4% decline in the March quarter during
the following year. In 2001, new orders declined 24.7% year-on-year to $72.4
billion. While we anticipated that computing orders would be seasonally strong
during 4Q01, we are encouraged by the accelerated order growth. We believe this
momentum will spill over to 1Q02, and will result in modest QoQ new order
growth.
Companies Mentioned
Company Name Ticker Price Company Name Ticker Price
Advanced Micro Devices(1) AMD $14.58 Altera Corp(1) ALTR $23.49
Intel Corp(1) INTC $33.80 Xilinx Inc(1) XLNX $40.38
Price quoted on February 5, 2002 Source: UBS Warburg |
