Semiconductor Equipment . . . Fahnestock expects Lam Research to report in-line operating results when they report on Wednesday. The firm believes that orders could fall short of guidance since foundry order activity remains slow; in addition, firm believes that potentially weaker orders from memory producers could result in lower orders next quarter. Price target is $11.
DuPont Photomasks expects a loss of $25.5 million to $26.5 million, or $1.42 to $1.47 per share in the third quarter, including a severance charge of $9.2 million, and a sales rebate gain of $1.5 million. Revenue is anticipated to come in at about $76.1 million for the period. Five analysts were looking for a loss of 70 cents per share on revenue of $81 million, on average. The company said results were hurt by the need to re-certify one of its plants in Asia, and customer service problems in France. For the fourth quarter, DuPont sees revenue ranging from $80 million to $84 million.
Lam Research estimates are for 3rd quarter $0.00 on $180 million. Expect orders $175 million. Memory expected to be only 25% of orders this Quarter, versus 66% last Quarter. More cautious on LRCX than other stocks because of more narrow product line. The firm reports 4/16.
KLA Tencor’s estimate for 3rd quarter is $0.12 on $300 million. The company conservatively guided for flat 3rd quarter orders; could disappoint investors. Expect cautious 4th quarter guidance (+5%). Although most expensive stock in the group, like it given dominant position in diagnostics/control. The firm reports May 23.
Teradyne’s estimate are ($0.28) on $325 million revenue. Bookings of $307 million. Expect 2nd quarter orders guidance +5-10%. Cost cutting on track. The firm reports May 15 w/ CC 4/16.
Semiconductors . . . Lehman believes that Integrated Silicon will report in-line numbers when earnings are released April 23rd. However, they are concerned that a tough pricing environment in 802.11b will pressure WLAN gross margins in the low 40% range versus low 50% in 2002. The firm believes that in the near-term, 2nd quarter expectations for 6% quarter/quarter WLAN growth are optimistic and firm is likely to review its 2003 and 2004 EPS estimates.
All about Semis . . . Wag the Dog. At a fundamental level, we've always found it a bit mystifying when folks say that chips should lead a tech recovery. It's like watching a dog's tail to figure out which way it is walking. Logically, chip customers should see their business improve before they start ordering chips more heavily -- and they are likely eager to tell investors that business is better even before the chip companies get the orders. Listen to the customers.
Of course, if the end-markets pick up, the semiconductor industry will get an extra lift since customers' inventories are pretty lean and there would be an order scramble to fill holes...which leads to tighter capacity...which leads to longer delivery lead times...which leads to greater pricing power...et cetera. The further back in the supply chain you are, the more (positive and negative) leverage comes from (positive and negative) inflections in demand.
When the dog is happy, the tail wags fastest.
Earnings season kicks into high gear this week, including reports from Intel, Texas Instruments, Linear Tech, Broadcom, Xilinx, AMD, Cypress and Fairchild. Expect that chip companies will not disappoint, but investors are likely to give as much or more weight to what other tech bellwethers (IBM, Microsoft, Motorola, et cetera). This is fair because hardware and software companies are at least one step closer to 'real' demand.
If hardware companies in particular do not rain on the parade, chip stocks could bounce short-term since investors seem to expect downward revisions news from chip companies. If hardware rains, it's going to be a wet week for chips. Essentially, the SOX story is the same -- riding the ranges until end-markets improve.
Prices on the spot markets for processors weakened significantly last week, as the discount to list on Intel processors widened from 11% to 15%, and on P4s from 13% to 19%. The price declines were concentrated on the higher end P4s, ahead of the launch of new P4 processors with the Hyper-Threading feature (currently only available on the 3.06GHz P4).
AMD processor prices fell sharply again, by 6% over the week, following the 7% drop in the prior week. AMD may be cutting list prices on its processors early this week, ahead of Intel's price cut on April 20th. Intel's price move will affect only the 3.06GHz P4, while AMD's price move will likely affect a number of parts. A number of the brokers complained of AMD's price cuts, as the company does not offer them any price protection, nor does it provide much advance notice. As a result, most brokers have been very cautious about building much inventory of AMD processors. This has been a problem in particular for the newer Barton-core based Athlons, which have been
relatively popular among buyers. Partly as a result of this, even though the company has a much broader product portfolio now that includes a part at the ~$500 price point, the sweet spot of AMD's processor pricing distribution remains around the $60 - $70 range.
In other AMD related developments last week, Microsoft confirmed that it will release the 64 bit version of its Windows Server operating system for the Opteron around the April 22nd launch of the Opteron.
Following the launch of new processors on April 20th, and a 30% price cut on the 3.06GHz P4, Intel's next price cut averaging about 28% is scheduled for May 11. Anticipate that compared to previous years, Intel will adjust prices less often, and possibly by a lower amount in 2003. Intel lowered list prices 9 times in 2001 and 7 times in 2002. This year expect the company to lower prices about 5 times.
The reasons for this change are twofold:
* Cutting prices has not been very successful in stimulating volumes -- in fact the reverse may be partly true as buyers put off buying until the new prices are in effect;
* There are far fewer new speed grade introductions scheduled this year compared to previous years. As we have written a number of times recently, the clock speed on Intel's top-of-the-line processor will rise only about 10% this year, compared to 60 to 70% in recent years. In the past, each new processor speed tranche would require pushing down the existing 'speed-price stack' to make room for the new devices at the top.
Volumes in the spot remained light last week, as they have been for the past month or so. Our broker contacts are hopeful that the introduction of motherboards based on Intel's new Springdale chipset in about a month will help volumes. Initial builds should be ramping this month.
This week, Intel will launch its Canterwood chipset that is targeted at workstations and high-end desktops, and because of its higher price point may only have a limited impact on overall volumes. Over the week, Intel and VIA settled their litigation in regards to P4 chipset licensing issues. Recall that Intel had claimed that VIA was not licensed to ship P4 chipsets, while VIA claimed that due to its acquisition of S3's graphics chip business it had inherited S3's license. Many top-tier motherboard manufacturers, as a result, had declined to ship motherboards based on VIA's chipset. This settlement, now puts VIA on par with other chipset suppliers, from a legal standpoint, and according to press reports the company promptly raised prices slightly.
As part of the agreement, VIA would also be able to ship chipsets compatible with the newer 800MHz front side bus, just as Intel's Canterwood and Springdale are. We believe that by the time the back to school build begins this year, all of the major chipset vendors will have an 800MHz FSB compatible product offering.
DRAM prices moved higher last week with DDR 128Mb up 7% to $1.81 and DDR 256Mb up 4% to $3.42. SDRAM continued its strong run with 128Mb up 15% to $3.65 and 256Mb up 3% to $3.98. SDRAM is now selling at a 16% and 100% premium to DDR at the 256Mb and 128Mb densities respectively.
DRAM spot pricing has continued to move higher this week with a particularly strong showing by SDRAM 128Mb parts, which are now in a supply shortage. The recent DRAM price action is encouraging and may signal that the sector has set a firm bottom in place. Our channel contacts are seeing "windows of strength" on DDR, though not enough to be characterized as a strong market, and hot activity on SDRAM. One theory explaining the recent price strength is that DRAM manufacturers are attempting to raise contract prices by manipulating supply on SDRAM parts (and thus getting prices up) and then plan to follow suit with DDR later in the second half of the year. A second theory is that Intel has released a bunch of older SDRAM compatible Brookdale chipsets in an effort to clear that inventory ahead of its Springdale launch next month. Those boards are consuming the limited supply of SDRAM, which is driving up pricing. A third theory centers around the impact that Hynix is having on the spot market. By diverting its output to European and U.S. inventory warehouses in response to the U.S. Department of Commerce tariff and the anticipated European ruling, the company is putting less supply into the Asia-Pac spot markets, thus firming ASPs. Overall demand seems to be stable, not particularly strong nor weak, though a couple of our contacts have gotten noticeably more optimistic on DRAM performance for the second half of 2003.
The South Korean government is seeking to have the U.S. DoC tariff ruling against Hynix suspended and in exchange will offer to set DRAM pricing minimums for Hynix's supply output. Samsung Electronics, the worlds second largest semiconductor manufacturer, reiterated its plans to spend $4.6 billion on semiconductor capital expenditures in 2003 saying that "robust sales of flash memory chips have offset a drop in dynamic access memory chips (DRAM)". This is the first time in many years that Intel is not spending the most on semiconductor capex. Nanya announced that it is increasing its capex budget to $670 million this year from its previous expectations of $450 million. Some of this increased spending is going towards building a 300mm joint venture fab with partner Infineon. The company's output is increasing from 13 million 256Mb units per month in January to an expected 20 million units per month by year-end.
Bell Micro(NR), a technology distributor of hard disk drive and storage systems, announced a profit shortfall and restructuring initiative on Wednesday April 9th due to poor industry conditions. While sales were in- line, profits were lower than prior Street expectations. Don Bell, President and Executive Officer commented, "The technology product market environment continues to be very challenging...the combination of a continued soft economy in the first quarter and increasing product supplies placed significant pressure on pricing and therefore gross profits in the quarter...the industry outlook and geo-political environment do not lead to an optimistic industry outlook in the short term."
Bell is the largest distributor of Seagate and IBM/Hitachi hard drives and lists other storage companies like Western Digital and EMC on its line card. As such, we see Bell's comments last week as further evidence that disk drive channel inventories are problematic and production could be cut in 2nd quarter. Marvell's and Agere's hard disk drive IC business accounts for 51% and 35% of sales, respectively.
It has been said that there are lies, damned lies, and statistics. In particular, when data analysis flies in the face of common sense, I prefer common sense. Common sense tells us that there is a mismatch between the current trends at chip companies and the more negative trends in the markets they serve, and that the easiest explanation is that the chip industry is experiencing a mini-repeat of the inventory bulge that happened one year ago. However, if data analysis points to another scenario, it should at least be considered.
Analysts have analyzed multiple data to try to confirm and quantify our concern that 2003 year-to-date bears some resemblance to the 1st half 2002 chip inventory buildup. Perhaps most compelling is the data collected in Taiwan about the difference between foundry and OSAT trends -- more about that data in a moment.
However, a new analysis based on SIA data that dramatically quantifies the 1st half 2002 situation but somewhat contradicts the common sense scenario for 2003.
Beware means Be Aware. To be blunt, the SIA data set can have significant flaws since it is based upon a voluntary reporting system from a subset of industry suppliers. Black box formulas are used to extrapolate the subset to the global scene. One real distortion: the SIA counts shipments into the distribution channel -- in contrast to the way most chip companies recognize revenue at this point in time. Thus, channel fill and depletion causes greater volatility in the data than is likely present at the customers' receiving dock. In addition, reporting companies occasionally miss a month, and sometimes figures are revised. In other words, it is as flawed as any large data set such DOC or ISM figures -- and it is the best that we can get.
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