Semi Notes . . . It could be argued that 4th quarter 2003 may provide the first 'fair' year-over-year comparison for the chip industry in quite some time. For example, 1st quarter, 2nd quarter and 3rd quarter 2003 are arguably 'not fair' because of the effect of SARS, the Iraqi War, and also the major inventory 'head-fake' of 1st half 2002 distorts Year over Year comparisons. IF 4th quarter is a reasonable snapshot of the semi world, perhaps it can also be employed to gauge the picture for 2004.
Employing two different methods for estimating 4th quarter chip sales. First, total up the estimates for the stocks we follow (i.e., a bottom-up approach) and find that 4th quarter 2003 is up 9.0% versus 4th quarter 2002. Second, a 10-year average month-over-month extrapolation of the SIA data produces a 10.7% year-over- year comparison.
These calculations for 4th quarter 2003 are reasonably close to the 12% 'forecast of record' hurdle we project for semiconductor industry growth in 2004. Put differently, our 2004 industry forecast of 12% represents only a mild acceleration over the rate at which we are exiting 2003. 12% forecast of record is driven by end-market growth analysis coupled with ASP trends (anticipate a mildly rising ASP environment next year).
Chip companies are the tail of the tech dog, and the tail normally points backward, not forward. Thus, we try to find other data sources that might give us some inkling of intermediate or longer-term demand drivers. One of the sources we have found useful is the monthly Purchasing Manager Indicator report.
There are several important hazards in using the PMI. First, it is a US-centric data set, which is a mismatch with the worldwide nature of the semiconductor industry. In addition, the PMI can be "noisy", and in the past has shown false up-trends and false downtrends -- reversing course in subsequent months.
With those caveats in mind, it can be gleaned that Year over Year inflections in semiconductor shipments have generally lagged the PMI by 6-7 months.
The PMI data set a trough in April, which implies that semis should bottom around October or November of this year. This is reasonably close to the 3rd quarter bottom predicted by our analysis of Semiconductor Industry Association (SIA) unit and shipment data.
The question is whether the PMI can tell us anything about the shape of the post-3rd quarter semi curve. The two readings post-April have been just a shade under 50 (above 50 indicates a growth environment). In a (probably overly) strict interpretation, the PMI data would therefore imply no meaningful Year over Year re- acceleration for chips post 3rd quarter. More realistically, we anticipate that overseas markets, particularly Asia, will drive most chip industry growth.
In any case, we advise investors to keep an eye on the ISM data as a possible leading indicator of chip demand.
Summary: Processor prices were flat to down slightly in a holiday-shortened week. The discount to list on Intel processors widened by a point, but was unchanged on P4s. AMD processor prices slipped by less than 1% over the week. DRAM spot pricing was mixed last week with DDR 266/333MHz moving modestly higher while SDRAM and DDR 400MHz moved modestly lower.
Processors: Prices generally flat, with volumes light in holiday-shortened week
Processor pricing changed very slightly in the U.S. spot markets, with volumes somewhat light, in part due to the July 4th holiday. The discount to list on Intel processors widened from 6% to 7%, mostly due to further declines in prices of Celerons. On P4's the discount to list was unchanged at 6%. AMD processor prices were also pretty stable, declining slightly less than 1% over the week. Intel's 3.2GHz P4 has still not made it onto the spot markets, despite its formal launch about two weeks ago, likely due to limited shipments at this time. Even though processor trading volume remains thin, there has been a meaningful uptick in Intel motherboard volumes recently, according to some of our industry contacts.
As expected, Intel introduced new higher speed versions of its Xeon MP processors for multi-processor mid-range servers, along with higher speed versions of its 64-bit Itanium enterprise server processors. Dell, Hewlett Packard and IBM simultaneously launched servers using the new Itanium processor. Intel will be further augmenting its Xeon family next Monday (7/14/03), and introduce a 3.06GHz Xeon with a 1MB cache for workstations and low-end uni-processor servers; all of the older Xeons for workstations and uni-processor servers currently have a 512KB cache. Along with this launch, Intel will be cutting prices on six older Xeons by about 26% on average. On the Itanium side, next up is a low power version of the Itanium 2, codenamed Deerfield. Deerfield has a smaller 1.5MB level three (L3) memory cache, or half that of the Itanium with the smallest cache introduced last week, but will consume about half the power of the Itaniums built on the 0.18 micron process, or about 60 Watts While the introduction schedule of this part has not been released, we expect it will debut within the next two months.
Not to be out done, early last week AMD launched new versions of its 64-bit Opteron microprocessor for 4-processor and 8-processor servers, and also for uni-processor workstations and servers. These processors augment the Opterons for dual-processor servers introduced in late April. Nvidia announced that it had begun volume shipment of the nForce3 chipset for Opteron based systems.
Taiwanese chipset manufacturers Silicon Integrated Systems (SiS) and VIA reported their June sales figures last week. These two companies account for slightly less than 20% of global chipset market-share each. 2nd quarter sales at SiS were down 22% qoq, and down 30% qoq at VIA largely due to weakness in the white-box PC market during the quarter. Also suspect that both companies may have lost some market share to Intel in the quarter, as they obtained licenses to produce chipsets for the new P4s with the 800MHz front side bus (FSB) very late in the quarter, and therefore did not have a competitive offering against Intel's Springdale chipsets. Both companies expect a solid recovery in chipset sales in 3rd quarter.
Graphics controller and chipset manufacturer, ATI, announced that it had extended its cross-licensing agreement with Intel to produce chipsets with support for the 800MHz FSB. The company had introduced a P4 chipset with integrated graphics capability about two weeks ago, which according to some reports only supported a 533MHz FSB. We expect that in Q3 Intel's chipset business will likely see significant competition, with 800MHz FSB chipset offerings from SiS, VIA, ATI, and also from Acer Labs (ALi).
Estimates are that 2nd quarter motherboard shipments from the top-tier Taiwanese motherboard manufacturers declined 10% quarter over quarter, followed by a 26% quarter over quarter growth in 3rd quarter.
DRAM Spot Pricing Mixed: DDR 266/333MHz Moves Higher, SDRAM Slides
DRAM spot pricing was mixed last week with DDR 266/333MHz moving modestly higher while SDRAM and DDR 400MHz moved modestly lower. The DDR 128Mb 266MHz increased 4% to $1.85, the DDR 256Mb 266MHz increased 3% to $3.71, the DDR 256Mb 333MHz increased 1% to 3.94, and the DDR 256Mb 333MHz declined 4% to $4.73. The DDR price premium of the DDR 400MHz vs. the DDR 266MHz compressed to 28% from 36% a week ago. SDRAM prices continued to slide with the SDRAM 128Mb part declining 7% to $2.61 and the SDRAM 256Mb part declining 1% to $3.38. Since their interim peak set on April 11, SDRAM 128Mb and 256Mb parts have declined 28% and 15%, respectively.
Channel contacts indicated that activity last week was stronger than anticipated given the U.S. holiday. First half of July contract pricing negotiations are underway and we hear the most likely outcome is a 5% increase in all DDR parts with flat contract pricing for SDRAM parts. The DDR 400MHz contract prices may rise by more than 5%, though given the downtick in 400MHz spot pricing this week, more than a 5% increase in contract pricing may be too optimistic.
General sentiment in the market place is that DRAM supply continues to be tight, with both the DRAM manufacturers and PC OEMs/ODMs carrying lean inventory levels. Demand has been above average also with back to school builds driving some activity. Given the lean supply levels, it only takes a small uptick in demand to ripple through the DRAM sector, potentially sending spot prices higher.
Nanya said that its June revenues increased 7% compared to May. The company cited better DRAM pricing as driving its increased revenues. The company's total DRAM output for June was similar to its May output. The company claims that 38%-40% of its output was DDR400.
Micron and Infineon released specifications for their reduced latency DRAM II (RLDRAM II) architecture specifications. RLDRAM II is going to be the next generation mainstream DRAM, beginning to replace current DDR parts in early 2004. Remain watchful of the production schedule for these parts as a transition to DDR II will have major ramifications for DRAM pricing, as did the SDRAM to DDR transition during 2nd half 2002.
Powerchip announced that the company expects its capacity production to increase about 70% in 2003 compared to expected global DRAM bit growth of about 50%. Capacity is increasing at the company's 300mm Fab 2, increasing from 12,000 wafers per month to 15,000 wafers per month by the end of 2003 and 30,000 wafers per month a year from now. The company also stated that full capacity at the site is 40,000 wafers per month.
Pricing for NOR flash 16Mb firmed this week primarily due to a 19% increase in AMD's 16Mb TSOP F016 to $1.25 and a 9% increase in AMD's L-Volt TSOP LV160 to $1.25. This boosted the average 16Mb flash price 2.7% to $2.88. All other parts remained unchanged with the 128Mb average at $11.50, the 64Mb average at $10.70, the 32Mb average at $7.75, the 8Mb average at $0.60, and the 1Mb average at $0.35.
Samsung Techwin reported a 25% increase in digital camera shipments in June to 100,000 units compared to 1st quarter 2003. The company introduced two new digital cameras (Digimax V3 and V4). Koo also believes that memory per digital camera is increasing from 16MB to 32MB, while the 3M and 4M pixel specifications are becoming the standard. Digital camera demand is picking up strongly from 2nd quarter 2003. Increasing flash densities and increasing unit shipments of digital still cameras bode well for NAND flash, a segment that continues to outgrow the industry.
Boxmakers . . . Hewlett-Packard announced that it will acquire all of the SelectAccess SW assets of Baltimore Technologies. The identity management technologies in SelectAccess will become part of HP's Adaptive Mgmt SW portfolio, providing more secure user access to network services and enterprise resources. HP has been slower to react as evidenced by IBM's entry in this space a year ago from its acquisition of Access 360. Analysts have been writing about convergence for some time and the HP move certainly is in this direction. Given its dominance in network management with HP Open View, adding access control is a logical extension into one area of security. Baltimore was a fast growing encryption provider competing heavily against Entrust (ENTU) and RSA Security. When that market weakened, BALT was left with little growth and asset sales have been a frequent occurrence.
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