Semiconductor Equipment . . . Deutsche Bank cut its semiconductor capital equipment forecast to 2003 to zero from an earlier expectation for a 3 percent rise in spending on equipment by the chipmakers. Deutsche also said it had cut its price target on Dutch equipment maker ASML to 9.5 euro from 10 euro. Deutsche said it expects 2004 capex to rise 15 percent from 2003 levels. "We have reflected a more cautious timing, in our view, on two of the key projects this year - Samsung and Inotera - whilst also reflecting Intel's [s:intc] initial stance on 2004 capital spending (likely flat to down)," Deutsche told clients.
Credence was defended by Fulcrum (ahead of tomorrow's earnings report. The stock is selling at a significant discount to peers (63% discount to Teradyne, 57% discount to LTX Corp, 44% discount to A) despite the fact that CMOS is the only test equipment co that has no long-term debt and with a net cash per share of $3.40. The firm reiterated a Buy rating and $25 target, as price-to-book of 1.0x is close to its historic trough of 0.6x in 4th quarter 2002, comparable to the 1.0x found in 4th quarter 2001, and is lower than the previous troughs of 1.2x and 1.4x in 4th quarter 1998 and 3rd quarter 1996.
Semiconductors . . . Transmeta announced a design win with IBASE Technology in Firewall/VPN platform. The FWA7000 is a fast and fanless Firewall/VPN platform. The IBASE FWA7000 high performance level makes it ideal for use in the wireless local area networking or WLAN environment and is targeted for enterprise customers.
DSP Group has acquired Teleman Multimedia for $5 million in cash. Teleman has a silicon platform for video compression and decompression designed to interface with image sensors and panel displays. The platform enables high video performance using a small silicon area and low power consumption. DSPG will build a team of 40 designers to create new products with video features. DSPG already has one design win that integrates Teleman technology, with initial shipments expected in 3rd quarter 2004. By 4th quarter 2004 DSPG expects revenues to be +30% Year/Year due to volume shipments of new video products. Increased opex levels are expected to be $.04 dilutive to our 2003E EPS of $0.78. A one-time charge of $2.6 million related to in-process R&D and other expenses will be recognized in 2nd quarter 2003 and an additional $2.6 million will be amortized over a period of four years. Acquisition looks like a sensible use of cash, providing another growth segment to product portfolio.
Semi Commentary . . . Investor sentiment is a fickle thing, with the focus seemingly oscillating between the challenges of the present and the opportunities of the future. Based upon conversations with investors whom are more optimistic than we are, it seems that the prevailing sentiment is to 'look past' any potential problems created by SARS, Asian handset headwinds, weaker white-box demand, inventory effects, slower summer seasonality, et. al. in the belief that the second half will be better.
At one level, the premise is fairly reasonable. As we have shown in prior reports, the second half of the year is nearly always 'better' for the chip industry. Chip units have been higher in the 2nd half versus 1st half in all but two years (1985 and 2001) and 2nd half sales higher in all but four years (1985, 1989, 1996 and 2001).
However, for better or worse, the trick is whether the second half and 2004 will be as good as Street models predict. It is not as if expectations are a lay-up. For example, the 2004 consensus estimate for Texas Instruments is $0.72 (our estimate is $0.75), yet the company just posted $0.07 in 1st quarter EPS
(i.e., $0.28 annualized). In short, the models are generally 'success- oriented', as are the stock valuations, by our analysis. If estimates are cut over the summer, anticipate that chip stocks will fall -- as opposed to looking past any cuts.
This week we will be watching for end-market indications from Hewlett-Packard, as well as inventory, memory, processor pricing and PC motherboard data points. At the chip-level, Marvell is the only company reporting this week (Thursday after the close), and we expect a good result and outlook --complicated by the fact that Intel's Springdale launch happens the day prior. Continue to view the sustainability of Marvell's earnings momentum with doubt.
Last week, Intel's analyst meeting focused back upon the future. There is an apparent mismatch between Intel's unflinching view of near-term business conditions versus the sharp deterioration in motherboard trends. Intel is sticking to its 2nd quarter guns at the current time -- chipset backlog. Intel considers chipset business trends as a leading indicator of microprocessor demand. This is a logical supposition because chipsets are often bought and soldered onto a motherboard weeks before a CPU is plugged in (the high price and consistently declining prices of CPUs causes OEMs to put the processor onto the board at the last possible moment).
At the moment, Intel apparently has pretty good shipment volume and backlog of chipsets -- which adds to its confidence about the prospects for 2nd quarter. However,, the fact that many points in the PC supply chain have built component inventory at the request of customers (such as Dell) heightens the chance that shipments and backlog currently do not reflect current consumption rates. This is much more likely to affect chipsets than microprocessors because chipsets are a fraction of the cost of CPUs and have somewhat better price stability.
It often takes time for inventory effects to become apparent. Many think that Intel 'must' lower its guidance during its June 5th business update because of the weak motherboard data (currently anticipated by Kirk Yang to decline 13% sequentially in 2nd quarter, with a downward bias) and the fact that industry bellwether Dell projects that the PC market will decline 3-4% sequentially (6% excluding Dell) versus our Intel unit estimate of a 0-1% decline. With only about three weeks to go before Intel's business update, we would point out that there is no reason why the possible 'backlog illusion' created by supply chain inventory inflation must collapse within that time window.
WiFi -- the 'Killer Environment'. As expected, Intel emphasized again and again at its analyst meeting the
opportunity of wireless computing and coined the phrase 'killer environment' to describe the enabling effect that wireless creates for the development of currently unforeseen 'killer apps.'
As far as how wireless computing is directly benefiting Intel, COO Paul Otellini predicted that the majority of Intel performance notebook shipments will be Pentium-M (the processor portion of the Centrino platform) by the end of this year (see figure 1). Indeed, Dell stated during its earnings conference call last week that Centrino-supported notebooks constituted 50% of its notebook mix already at this point.
The strength in Centrino could potentially help Intel's ASP mix in the notebook segment over the next few quarters, although our understanding is that Intel does not expect to sustain a premium for the Centrino Pentium 'M' processor. Another thing to note is that it takes about a three percent increase in mobile CPU sales to offset a 1% decrease in desktop CPU (P4 plus Celeron) sales.
What is not yet clear to us at this time is whether Centrino in particular and wireless computing in general will drive more overall computer sales. At this point, none of the major PC OEMs are making that argument.
Earlier this month, Intel released its new product roadmap to its partners. There were only minor changes to the company's desktop roadmap, although the time period was extended out to 2nd quarter 2004. As we have been writing for a while, Intel is very clearly backing off the clock-speed ramp in favor of other features. For all of 2003, the desktop clock speed would have moved up from 3.06 GHz to about 3.4 GHz, or up only 10%, compared to a 50-60% annual increase in clock speed in recent years.
The 3.2 GHz P4 remains on-track for a late-2nd quarter introduction The company is sticking to its plan of introducing just one more faster P4 this year---a 3.4 GHz P4 in 4th quarter 2003, which will be followed by a 3.6 GHz version in 1st quarter 2004. Both of these processors will be based on the new Prescott core, and will be produced on a 90nm process. The smaller line-width will enable the inclusion of a much larger level-2 (L2) memory cache of 1MB, up from the 512KB currently. The larger L2 cache will be a much bigger factor than the clock speed bump, in improving over all processor performance. It is unclear at this time whether a faster P4 will be launched in 2nd quarter 2004. Intel will be trimming prices on its Celeron family of processors by about 12%, and introduce two new speed grades---2.5 GHz and 2.6 GHz on June 25.
On the desktop chipset front, with this week's formal introduction of the Springdale chipset, Intel expects to bring Hyper-Threading technology and a faster 800 MHz front side bus into the mainstream. Hyper-Threading (HT) allows a single microprocessor appear as multiple processors to the operating system and software, enabling superior performance in typical multi-tasking user environments where multiple applications are running simultaneously.
The next upgrade to Intel's chipset is scheduled about a year from now, when Intel launches the Grantsdale in 2nd quarter 2004. Grantsdale will support the next generation memory standard: DDR2, and will include support for the faster bus interface: PCI-Express. As was the case for Brookdale, and Springdale, one version of the Grantsdale chipset will incorporate an updated integrated graphics core. Following this week's introduction of Springdale chipsets, a small pricing reduction of about 3% is scheduled for the end of June, unchanged from prior plans.
The Centrino Pentium-M continues to pervade Intel's mobile line-up, with the somewhat older P4-M processor relegated only to the "full-size" segment where users demand desktop-like performance on a transportable platform. The wireless capabilities of the Centrino platform will be augmented with the
introduction of the 802.11 a/b chipset in 3rd quarter 2003. This will be based on Intel's own silicon, unlike Intel's current 802.11b solution that uses chips from Texas Instruments and Philips.
The introduction of Dothan, the 90nm based successor to the Pentium-M remains on schedule for introduction in 4th quarter this year. As on the desktop P4, the 90nm production process will enable a doubling of the L2 cache to 2MB from 1MB on the Pentium-M. Unchanged from prior plans, the Dothan will debut at 1.8 GHz, followed by a 1.9GHz version in Q1'04, and new on the roadmap is the 2 GHz version scheduled to launch in Q2'04. The roadmap for the low-voltage (LV) version of Dothan has also been extended out to Q2'04, when a faster than 1.3 GHz version will be launched.
Disappearing entirely from the new mobile roadmap is the Pentium III-M processor, which was scheduled to ship only through the current quarter. The P4-M will continue to target the full-size performance notebook segment, and like the desktop P4, will transition to the 90nm Prescott core. However, that transition will lag the desktop version by about a quarter, and will ramp to about 3.5 GHz in Q1'04.
Processor prices have been stable, although the blended discount to list on Intel processors narrowed due to the appearance of the P4 3GHz with 800MHz FSB. Volumes remained light, especially as new processors and Intel's new chipset debut this week. DRAM spot prices edged lower last week while contract prices appear to be stable.
With the recent availability on the spot markets of Intel's top-of-the-line P4- 3.0 GHz with 800MHz front side bus (FSB), the discount to list on Intel processors narrowed two points last week to 13%, and on P4s from 16% to 14%. As availability of this part is somewhat limited, it is trading at a 9% premium to its list price of $417. Later this week, Intel will launch three additional P4s (2.8GHz, 2.6GHz and 2.4GHz versions) with 800 MHz FSB support, that should lower the price premium on the 3.0 GHz part. AMD processor prices were also relatively stable, slipping 1% over the week. Early last week, AMD introduced its fastest Athlon, the XP3200, which offers 400MHz FSB support, unlike the 333MHz FSB in the older Athlons, and estimate runs at a clock speed of about 2.2 GHz. Despite the significantly lower clock speed compared to the fastest P4s, AMD claims that the XP3200 outperforms Intel's fastest P4. Clock speed is not the only factor that affects processor performance, however there are very few independent benchmark results that either confirm or refute AMD's claims at this time. AMD is currently pricing the Athlon XP3200 at $465, a significant premium to the P4-3GHz that is priced at $417.
The processor spot markets remained slow last week, in part due to seasonality and also due to the expected launch of Intel's new P4s and its Springdale chipset this week. We believe that this launch schedule was chosen by Intel to ensure that Taiwanese motherboard manufacturers would have new products to display at the Computex exhibition in Taipei, originally scheduled for early June. Computex has evolved into an important event for PC manufacturers as they finalize product introductions for the important back-to-school sales period. As we have written previously, however, this years Computex has been postponed due to travel limitations arising due to the SARS epidemic.
The Springdale chipset (i865) will become Intel's mainstream chipset for desktop motherboards and will replace the current Brookdale (i845) chipset. In addition to incorporating support Hyper-Threading (HT), a feature that will be on all new P4 processors, Springdale will also support a dual channel memory interface for memory speed up to 400 MHz (up from 333 MHz on Springdale), a faster 800 MHz FSB (533 MHz on Brookdale), and an 8x accelerated graphics port (AGP) (4x on Brookdale).
There will be four different versions of the Springdale, including one with built-in integrated graphics. All of these features are already available on the Canterwood (i875) chipset released in mid-April, however, the Canterwood is targeted primarily at the workstation segment. It appears that for at least the next two or three months, the Springdale will have virtually no competition as 800MHz chipsets from Silicon Integrated Systems (SiS), VIA, and Acer Labs (Ali) will only be sampling while the Springdale volume shipments start this week.
With SARS continuing to impact the whitebox PC segment in Asia Pacific, and particularly in China, Taiwan based hardware analyst Kirk Yang further trimmed his 2nd quarter shipment estimate for the top-tier Taiwanese motherboard manufacturers to (13%) qoq from (10%) previously. Kirk estimates that shipments will decline once again in May by 5% mom, following the 14% decline in April, before recovering in June, aided by new product introductions.
DRAM spot pricing declined modestly last week by 2-5% while believe contract prices were essentially unchanged. DDR 256Mb declined 3% to $2.97 while DDR 128Mb declined 2% to $1.54. Lower volume SDRAM declined with the 128Mb down 4% to $3.28 and the 256Mb down 5% to $3.22. SDRAM 128Mb continues to be priced higher than both the SDRAM and DDR 256Mb parts and even the DDR 256Mb 333MHz parts. The DDR 256Mb 400MHz is priced at a 23% premium to the standard 266MHz part.
Channel Checks. As has been the case for several months running, DRAM spot pricing remained relatively stable last week, with a slight downward bias. Weakening motherboard data points and poor April PC sales point to a somewhat weakened consumption pattern for DRAM. However, three factors are at least partially offsetting this weakness: 1) increased DRAM content per PC, 2) certain DRAM suppliers such as Infineon have let internal inventories drift upward in an effort to stabilize market pricing, and 3) distributors and ODMs are holding an extra week or two of buffer inventory to prevent against supply chain disruptions.
Dell confirmed this last point in its quarterly conference call last week when it mentioned that it has instructed its component suppliers to carry an extra week or two of inventory at its hubs, including extra DRAM memory. Dell also mentioned that the declines in component pricing should be slower this quarter (down 0.5% per week as opposed to down 1%) due to firmer LCD and memory pricing.
The fact that DRAM contract pricing is holding its own (or even modestly higher, as Infineon argues) represents a modest positive for the DRAM manufacturers, in our view. From a U.S. investor standpoint, however, Micron's apparent production struggles make the theme less actionable.
Other DRAM News. Hynix reported its 1st quarter earnings last week with $568 million in revenues and an operating loss of $201 million for the quarter, versus $290 million in operating losses in the prior quarter. Despite the continued operating losses, the company claims that it is moving rapidly ahead to 100nm production. Management claims that it will have 20% and 65% of total production at 100nm in 2003 and 2004 respectively. Given the company's low cash balances and high debt levels, we are skeptical of management's ability to ramp 100nm volume to those targets. Infineon and Micron are currently ramping 110nm production. Finally, talks broke down between South Korea and the U.S. over the suspension of Hynix's tariffs. Hynix will be required to post a 57% tariff or a $25 million monthly bond on its sale of foreign manufactured DRAMs in the U.S.
For Micron, continue to believe that a $3.75 ASP is appropriate given estimated contract prices quarter-to-date, spot market pricing quarter-to- date, and the relatively large volume of Micron's relaxed-quality parts being sold with SpecTek branding.
Micron and Infineon also announced architectural specifications for a next generation DRAM product aimed at high bandwidth networking and communications markets. Reduced latency DRAM II, or RLDRAM II, will operate at 400MHz and enables ethernet transfer rates of 10-40 Gb/second.
Boxmakers . . . Sales of PCs in China will fall short of earlier forecasts by 15-20% in the second and third Quarter’s of this year due to the impact of SARS, says Taiwan’s Market Intelligence Center (MIC). Asia/Pac just a little over 10% of Dell mix, but region expected to contribute 2-3% points of growth; a 25% delta in China sales (units were up 67% last Quarter) for 2nd quarter at Dell, would drive a variance of about $100 million or roughly 1% of current $9.7 billion revenue estimate.
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