GS TWIS - CIO insights into INTC v AMD,
2005 priorities; solid Q4/Q3 CPU growth
THIS WEEK IN SEMIS ('GS TWIS') (V2 N47) - 1) CIO'S attending the GS CIO
Conference indicated 2005 should be up modestly. Themes included storage, efficiency
and regulatory (Sarbanes Oxley) compliance as priorities; AMD's traction in servers and
some potential in enterprise desktop; impact of digital home on business plans, perceived
growth opportunities and employees; the lack of a "Next Big Thing" allowing spending
delays. 2) Q4 Taiwan notebook maker unit growth is tracking ahead of seasonality, while
Q4 motherboard (equivalent to desktop PC's) units appear to be trending below. The
implied Q4/Q3 PC unit growth, corroborated by Hard Disk Drive units and other checks,
confirm our Intel and AMD Q4 growth expectations remain conservative. 3) Retail
NAND flash card prices were down 5.3% W/W and down 8.8% M/M. NAND flash chip
spot prices were down 6.5% W/W and 10.8% M/M. 4) Only 3 of 25 stocks we cover were
up last week, with the average stocks down 3% W/W. Our coverage view is Neutral.
1) GS CIO CONFERENCE IMPLICATIONS FOR SEMIS: IT SPENDING TRACKING
UP MODESLTY FOR 2005; CIO'S VERY SATISFIED WITH AMD PRODUCTS;
SECURITY, STORAGE, REGULATORY COMPLIANCE AND THE DIGITAL
HOME ARE PRIORITY AREAS.
We attended the GS CIO Conference in New York last week, which featured CIO's from
Goldman Sachs (NC), Fidelity Investments (NC), Coach (COH, OP/C covered at GS by
Margaret Mager), Jones Apparel (JNY, IL/C covered at GS by Margaret Mager), Tyco
International (TYC, OP/A covered at GS by Jack Kelly), United Technologies (UTX,
OP/C covered at GS by Glenn Engel) and Verizon (VZ, OP/N, covered at GS by Frank
Governali). These companies comprise four of the largest end markets for IT spending
and represent sectors that aggregate to 56% of total end demand (Table 1).
TABLE 1. CIO PANELISTS REPRESENTED 4 MAJOR END MARKETS AND 56%
OF TOTAL TECH END DEMAND
Normalized end market estimates Financials 21% Communications 16% Manufacturing
14% Government 11% Services 8% Tech 6% Retail 5% Healthcare 5% Transportation
3% Utilities 3% Education 2% Other 6% Total 100%
Source: GS Research estimates
A) CIO COMMENTS SUGGEST IT SPENDING UP 7% ON AVERAGE IN 2004 AND
FLAT TO UP ANOTHER 6% in 2005. CIO comments from this panel suggested that IT
spending for these companies could be up about 7% in 2004 and between flat to up 6% in
2005. This was essentially inline with the latest 2005 GS survey estimate of up 5.4%.
The panel projects a long-term sustainable IT spending rate of 5.4%, not far off the 6%
growth we believe is the long term semi revenue growth rate.
B) AMD VERSUS INTEL: AMD SENTIMENT VERY POSITIVE; POWER
MANAGEMENT/COOLING ISSUES HIGHLIGHTED AS GROWING IN
IMPORTANCE. AMD garnered very favorable commentary when asked about its competitive
position versus Intel, with a few panelists specifically noting that right now AMD is clearly
outperforming Intel. This is not surprising in the x86 Server space as AMD has a 64-bit product
and none of the companies on the panel had deployed Intel's new 64-bit Xeon. While expressing
concern over recent Intel execution stumbles, several CIO's also simultaneously voiced their
satisfaction with AMD products; one CIO described his entire server infrastructure as an
AMD/Linux-based system, though he noted that AMD-based products have not yet made it to the
desktop in his organization. If AMD could begin to realize enterprise desktop wins its average
selling prices could go through another upcycle. However, Dell's lack of use of AMD continues to
be a major hurdle in the enterprise. One CIO in particular noted that while he was very impressed
with what he's seen so far from AMD products, but went with Dell as part of a recent equipment
refresh because Dell offered him an attractively priced bundled package of notebooks, desktops
and server equipment.
On the enterprise front, two specific issues raised were server power management and server
cooling issues as companies sought to reduce the financial impact that significant power usage and
equipment cooling efforts have on their operating expenses. Recently, AMD introduced their AMD
PowerNow power management technology for their Opteron-based server products, which the
company says decreases overall power consumption and eases the strain on datacenter cooling and
ventilation systems. Intel already has a similar feature in place on their server MPU's. VLTR (IL/N)
has significant exposure to enterprise power management, particularly with 90nm processors that
will ramp in 2005.
C) PRIORITY AREAS: SECURITY, STORAGE AND REGULATORY COMPLIANCE RANK
HIGH; EFFECTS OF THE DIGITAL HOME BECOMING INCREASINGLY MORE
SIGNIFICANT; ABSENCE OF A "NEXT BIG THING" ALLOWS FOR DELAYS.
The focus on security applications remains high as CIO's seek to protect their IT infrastructures.
Storage equipment and regulatory compliance are both top priorities and are correlated with one
another as more demanding regulatory requirements necessitate the need to store and retain more
information. Along these lines, the panel remarked that the biggest immediate technology impact of
Sarbanes-Oxley is the deployment of internal IT resources rather than increased IT spending, with
storage and security being noted exceptions. The panel did note that SarBox attention has caused
some 2004 projects to be shifted further down the IT queue, suggesting those projects could be
addressed in 2005. Semi companies under coverage with exposure to storage include LSI (U/N),
AGR.A (IL/N), ALTR (IL/N), XLNX (IL/N), BRCM (IL/N), MRVL (OP/N), PMCS (IL/N) and
AMCC (U/N).
D) The emergence of the digital home was also highlighted, as the replacement of older analog
electronic components with newer digital components and networked systems continues. Verizon
in particular spoke about ramping up efforts to drive higher bandwidth into the home to leverage
the capabilities of digital technology, and described the living room as potentially a more
interesting opportunity than the office from an IT standpoint. Semi companies under coverage with
exposure to the digital home include ATYT (IL/N), TXN (IL/N), NSM (OP/N), BRCM (IL/N),
ALTR (IL/N), XLNX (IL/N), LSI (U/N), PHG.AS and STM (OP/N and IL/N respectively, covered
at GS by Matt Gehl). For a more in- depth analysis of the impact of the digital home for
semiconductor companies, please see our October 11th report entitled "Digital Media v1.0: Digital
TVs and Semiconductors"
E) When asked about the "Next Big Thing" that could drive IT spending, the panelists said there
does not appear to be one at this time and noted that more CIO's are taking a "show-me" approach
to spending on new applications; waiting to see clear demonstrations of positive ROIC, getting
more from spending less and leveraging the capabilities of their current infrastructure. For
example, CIO's are increasingly relying on virtualization software (like EMC's VMware) to get
more productivity and efficiency out of existing server systems. RFID, commonly perceived to be
2 Goldman Sachs Global Investment Research
December 12, 2004 Analyst Comment
the "Next Big Thing" particularly for retail companies, was regarded by this panel as a more
long-term area of investment that does not currently present a justifiable return on investment.
Recent checks we have done in the RFID space indicate that 2005 will still be a year of mostly
standard oriented progress before seeing a revenue ramp in 2006. Semi companies with potential
exposure to RFID include Texas Instruments (IL/N), PHG.AS and STM (OP/N and IL/N
respectively, covered at GS by Matt Gehl).
2) Q3 TAIWAN NOTEBOOK UNITS TRACKING AHEAD OF SEASONAL PATTERNS;
MOTHERBOARD (DESKTOP PC) UNITS BELOW SEASONAL TRENDS DESPITE
STRONGER THAN SEASONAL NOV/OCT UNIT GROWTH. Checks indicate that December
orders and Q4 notebook units overall are currently tracking slightly ahead of seasonal patterns.
Overall NB units should grow 21% in Q4, faster than desktop units and ahead of the 18% seasonal
average. Q4 motherboard shipments have passed the seasonal peak and unit shipments overall
appear to be trending below seasonal patterns despite stronger than seasonal MB unit growth
Nov/Oct. GS currently estimates that Q4 motherboard units will grow 13%, below the Q4 seasonal
mark of +22%. Against this backdrop our Intel and AMD microprocessor unit estimates appear
very reasonable, with some potential for upside. In addition solid updated from hard disk drive
producers, particularly from STX (IL/N, covered at GS by Laura Conigliaro) and MXO (NC),
further support confidence in our Intel and AMD estimates.
TABLE 2: MOTHERBOARD, NOTEBOOK, INTC & AMD MPU, AND HDD UNIT GROWTH
ESTIMATES, Q3/Q4.
PC Mkt* AMD INTC DT Mobile Ent'prse Total Unit growth MB NB (Implied) MPU MPU HDD
HDD HDD
HDD 2004 Nov/Oct M/M 0% 0% -- -- -- -- -- -- -- Seasonal Nov/Oct M/M -7% 6% -- -- -- -- -- --
-- 2004 Q4/Q3 (est) 13% 21% 14% 10% 10% 9% 14% 4% 10% Seasonal Q4/Q3 22% 18% 19%
7% 11% 12% 15% 12% 12% *pc market implied equals (0.75*MB + 0.25*NB)
Source: GS Research estimates
3) WEEKLY MEMORY MONITOR
Our survey indicates that retail flash card prices continued their flat-to- down trend of late, down
5.3% W/W and down 8.8% M/M. NAND flash chip spot prices declined as well, with spot prices
down 6.5% W/W and 10.8% M/M.
TABLE 3. FLASH MEMORY PRICES: W/W, M/M, AND Q/Q CHANGES
W/W M/M Q/Q 12/10/04 Change Change Change NAND Flash Spot (Low) 512Mb (64Mbx8)
$4.0 -16.0% -16.7% -2.4% 1Gb (128Mbx8) $8.6 -3.1% -5.3% -8.1% 2Gb (256Mbx8) $17.5 -0.9%
-10.7% -3.8%
USB Flash (Lowest Retail) 512MB $39.9 -20.2% 0.0% -37.7% 1GB $79.9 -0.1% 0.0% -44.9%
2GB $114.6 -42.7% -32.6% -75.8%
Secure Digital (Lowest Retail) 512MB $35.0 0.0% -30.0% -53.3% 1GB $76.6 4.9% -0.4% -48.9%
xD (Lowest Retail) 512MB $84.0 -3.4% -10.7% -45.8%
Compact Flash (Lowest Retail) 512MB $39.9 0.0% 10.8% -28.8% 1GB $73.0 3.8% -2.7% -38.7%
2GB $119.9 -19.2% -13.1% -52.0% 4GB $219.9 -45.0% -45.0% -67.9% * GS SNDK ASP est
change, Q/Q N/A N/A N/A -27.0%
W/W % Chg Price/MB Retail -5.3% M/M % Chg Price/MB Retail -8.8% W/W % Chg Price/MB
Goldman Sachs Global Investment Research 3
Analyst Comment December 12, 2004
Spot -6.5% M/M % Chg Price/MB Spot -10.8%
Source: Amazon.com, Buy.com, DRAM Exchange
4) WEEKLY PRICE PERFORMANCE
Despite oil closing under $41 for the first time in 4 months, semiconductor stocks under coverage
fell 3% W/W as the market digested inline or negative news from TXN (IL/N), NSM (OP/N),
ALTR (IL/N) and XLNX (IL/N). Only 3 stocks were up (NVDA (IL/N) up 12% W/W on news that
it will receive royalties from Sony's next generation entertainment system, and AGR.A (IL/N) up
11% W/W, as the market read through strong results from MXO (NC) and STX (IL/N, covered at
GS by Laura Conigliaro), and NSM (OP/N) on better than expected margins). The worst
performers of the week were ALTR (IL/N, down 13%) and XLNX (IL/N, down 8%), as both
companies missed expectations on their mid-quarter business updates. |
