RadarView
Radar System Traders, LLC
Volume 1, Issue 2
September 28, 1998
PART I
First Question: What is RadarView ?
Well, I got tired of not writing anything and did not want to get out of the habit of providing a newsletter.<GGG> Given that I did not receive a list to cross reference to, I figured I would ad-lib and get on a semi soapbox.
Second Question: What happened to Volume 1, Issue 1 ?
Well, I could say that I was toying with your brains and wanted to make you think you missed something. But the truth is Volume 1 is waiting for approval by a regional brokerage company analyst.. It is a compilation of 2-3 pages of neat stuff on ESFT but it includes some of this analyst's work. I want to get her permission to reprint it.
Third Question: Why did you name it RadarView ?
Good Question. Too bad I don't have a good answer.
Opening Commentary
The semiconductor industry recession touched off by the Pacific Rim financial crisis and its negative effect across the global economies is into its 10th month. As of July the worldwide semiconductor market has declined 20% from its 11/97 recovery high and fallen 27% below the record high reached in the latter part of 1995. We have seen two significant recessions back to back, the first in 1995-96 and the second in 1997-98.
The global semiconductor industry has declined sequentially each month since November 1997. I estimated that we might bottom during the fourth quarter of 1998 and growth resuming in the latter part of first quarter of 1999 to late second quarter 1999. This continues to be my current opinion.
Much of the sales declines and revenue shortfalls have been caused by lower component prices, especially in DRAMs, but has affected almost every part of the sector. Worldwide IC unit volume grew 17% year over year in the first quarter of 1998 as contrasted with a 6% decline in sales, and 1% in the second quarter versus a 14% decline in sales.
Excess capacity and price pressures will continue to be a problem well into next year, compounded by the emerging Microprocessor pricing wars. (see related commentary).
As we move through this phase of lower demand, semiconductor shipments have been negatively affected by the substantial amount of inventory compression throughout the supply chain. We had a brief respite a few months ago when Micron reported a slight increase in 64 Meg DRAM demand and starts queue. It looks as if it was a false start but the reversal of this inventory contraction will probably signal the recovery of this sector.
We may be at the point of bottoming and scrapping this bottom. I have been waiting for the huge volume of earnings warnings and for a more negative Book to Bill set of figures. While all of this is subjective and possibly a tad bit optimistic on my part, certain selective companies I have spoken about are reporting slightly higher-than-expected third quarter bookings. Whether it is because of the time of year, the PC market is showing some strength as can be seen by DELL's recent share price. Intuitively, with all the cutbacks in production, we must be seeing inventories starting to normalize as excess inventories are reduced or written off. While we still have a few more days to receive the bad news, is it just me or have the number of third quarter negative pre-announcements gone down??? Also, according to some sources, at the end of this month, this industry will have declined for 10 months, equal to its longest prior contraction, which was the very bleak 1984-85 downturn. Don't get me wrong, I still think the light at the end of the tunnel is still mid 1999. My rationale is that, even with an upturn, the recovery will have to overcome the present problem of excess capacity that will extend into much of 1999. This is why I am probably more focused on the specialty chip manufacturers, since they might have a fast ramp to eat into excess capacity issues.
The industry grew 42% in 1995, declined close to 9% in 1996, and gained 4% in 1997. For 1998, it is estimated that the decline in the global semiconductor market will come close to 13%, with single digit positive growth ~ 8%) in 1999 followed by only 18% in 2000. This is probably when the new equipment, processes, and device technologies will have to kick into gear to meet the needs of the market. The major assumption is that Japan, Korea and the rest of the Pacific Rim nations do their part to correct their fiscal improprieties and general global economic conditions do not weaken further due to the euro conversion or the Y2K Millenium issue.
We all are aware that, as each day goes by, we see an increase in semiconductor content in most of the products that are part of our daily lives and activities. This move to increased IC content should help fuel the recovery and might even lead to industry1s growth.
Stock prices and values are in the semiconductor sector are extremely depressed and have been deserted, for the most part, by institutional investors. Check your historical levels of institutional ownership of your favorite stock and you will probably determine it is "underowned". LRCX might even be a case in point, but I haven't checked yet. At one time, I believe it was 83% institutionally owned. Once the industry recovery starts, we should see the institutions "herd" to these stocks and help fuel rising semiconductor stock prices. This might even extend for a few years since the semiconductor stocks have under-performed relative to the other sectors for at least the last 3 years.
NEWS OF PARTICULAR INTEREST AND TIMELY TOPICS
Intel Considers Taking Stake In Micron (09/25/98 1:03 p.m. ET) Electronic Buyers' News techweb.com
Intel seems to be negotiating with Micron Technology for a minor equity stake in the DRAM producer. This would give Intel a steady supply of memory, and provide Micron capital dollars to pursue expansion plans, both in Lehi, UT and the 3 acquired TXN DRAM facilities. Intel's stake in Micron would ensure a continued supply of DRAMs, prevent another shortage, and keep DRAM prices from rising again. it would also give Intel high leverage in the DRAM market, forcing major global DRAM competitors to accelerate their DRAM yields to keep up with the lower-cost Micron chips.
Micron's ambitious expansion plans could make it the overwhelming leader in the global DRAM market. This might lead to Intel partnering with Micron on some of its 300-mm-wafer development technology which could, in turn, be deployed in the Lehi facility. The 300mm wafer technology would let Micron launch this next-generation wafer size at the same time as other chip makers when this new technology moves into the mainstream market.
Micron Technology became the second-largest memory chip maker in the world after absorbing the DRAM operations of Texas Instruments a few months ago. Micron was given a long-term, royalty-free cross-licensing agreement with TI, which continues to collect royalties from other DRAM suppliers for its chip patents. Prior to this, Micron held fifth position in the world. Micron would have 14% of the market versus #1 supplier Samsung as 18.8% and ahead of NEC at 12%. Micron inherited TI's memory sales and marketing arms so it seems likely that Micron will pick up TI's memory accounts. Micron also gains a global manufacturing presence with the TI plant in Italy and in two joint ventures in Japan and Singapore.
Micron is well known for its ability to produce memory chips at a very competitive cost, which has allowed Micron to remain a major force in the DRAM business even when oversupply drives memory prices down dramatically. The royalty-free cross-licensing agreement with TI gives Micron an additional 2 percent price advantage over all its competitors.
TI cut this deal for $800 million which involves about 28.9 million shares of Micron common stock valued at $641 million when the MU closing price was $22.19, and picking up $190 million of government debt related to the Italian operations. TI became Micron's largest shareholder, with it owning close to 17 percent of the company. TI also loaned Micron $750 million in cash to help fund the business transition, with a good deal of it expected to be used converting TI wafer fabs over to the Micron DRAM technology.
Unconfirmed it is comment by a relative in Salt Lake City, UT, that INTC may also be looking at land in Draper, Utah to build a facility. This is just a stone's through from the Micron Lehi, Utah facility.
Memory chip firms to cut back on DRAM Production
The leading Japanese memory chip makers plan to cut back on DRAM production in response to continuing price drops. NEC, Toshiba, and Mitsubishi Electric intend to reduce the number of 64-megabit DRAM chips produced in fiscal year 1999 by close to 28% in order to reduce losses. If true, there are those than believe that DRAM demand will catch up with and exceed supply, especially with the recent postponements of new manufacturing facilities and cut back s on production such that we could see a shortage by as early as 2000. A fast rack manufacturing facility takes about 16 months to build from the ground up and more than 9 months to retrofit or ramp up exisitng facilities. NEC will go from 15 million chips per month down to 10 million chips while Toshiba will go from 10 million to 7 million, and Mitsubishi will reduce its output to roughly 4.5 million from just under 5 million.
Supply exceeded demand by 9% last year and will probably drop to 2% this year and 1% percent next year. We cross over to the demand side exceeding supply by 2000.
As mentioned in the above article, Micron Technology is apparently bucking the trend, planning to boost production and also buy into KTI Semiconductor, a subsidiary of giant Kobe Steel. KTI is expected to increase production also, over the next few years., even though the prices for 64-megabit DRAMs, now replacing 16-megabit chips as the standard, will continue to drop.
Varian sees Q4 earnings drop from Q3 (09/25/98 9:11 p.m. ET)
techweb.com
(Reuters) -- Varian Associates stated that weakness in the market for semiconductor equipment would push its 4th earnings significantly below the reported 3rd quarter earnings of 61 cents a share. The operating loss in its semiconductor equipment unit will affect the gains in its health care and instruments business segments in the upcoming October fiscal 4th quarter earnings release. First Call had forecasted a profit of 66 cents for this fiscal 4th quarter. Varian will take a $6 million charge against 4th quarter earnings to cover the 35% to 40% downsizing of jobs at 2 of its semiconductor equipment plants in Mass.
Their CEO believes current estimates suggest the chip industry downturn could last another four to six quarters. He also believes semiconductor equipment industry is plagued by over-capacity and the financial crisis in Asia, which has lead some customers to stretch out deliveries and postpone orders.
VAR could be a candidate for the herd mentality this morning.
Cabletron shops for a boost - CNET News.com September 25, 1998, 1:00 p.m. PT
209.1.112.252
CS is planning to roll out a series of equipment targeted at wireless local networks, remote access, and wide area connections through this Fall and into the first half of next year. The launch of these capabilities, which is a departure for this switch and hub-focused Cabletron, could be what CS needs to mitigate fears that the company might be in decline. It may show that Cabletron can be a player in markets in which they have been previously weak.
The launch of their new wireless networking capabilities will occur at the ComNet trade show in San Francisco. These capabilities are based on technology the company acquired from Digital Equipment's network products group.
The ComNet rollout will be followed by a remote access and wide area focus at next month's Networld+Interop networking summit in Atlanta, featuring technology CS has acquired from Ariel and FlowPoint.
Using the FlowPoint and Ariel technology, Cabletron hopes to bid for a portion of business-oriented integrated services digital network (ISDN) and digital subscriber line (DSL) deployments, taking advantage of new hardware for both ends of the connection.
The wide area activity on the SSR side of Cabletron's business is intended to attract the eye of large corporate networks and service providers who are increasingly using a networking "fabric" based on fiber optics.
Cabletron is encouraged by the fact that they are still routinely invited to bid on large multi-million dollar deals. Northern Telecom's acquisition of Bay opened some partnership/OEM opportunities with Lucent (LU) and Ericsson (ERICY) since both of them were either partnering or considering partnering with Bay. Revenue will probably remain an issue going forward but the Yago switch/router is looking good. They have s won some sales in the 50 unit range, including Goodyear.
War of the Pentium II and Other Microprocessors
Intel is expected to cut prices on its Pentium II and Celeron processors October 25, a move that will be followed by price cuts on AMD's K6-2 and K6 processors in the same week. This means the Intel 333-MHz and 300-MHz Celeron chips with integrated cache memory will be selling for $160 and $139, respectively. AMD's K6-2 and K6 chips will probably will sell for 25% less or even lower. AMD typically sets wholesale prices for its chips 25% lower than equivalent than Intel products. K6-2 chips will compete against the Pentium IIs for pricing while the K6 chips will be priced against the Celerons.
AMD processors appear in sub-$1,000 PCs like IBM's Aptiva consumer model E2U. National Semiconductor (Cyrix) is delivering ultra-low-cost chips. Asian entities are coming out with $399 PCs next month based on a Cyrix chip. IDTI is no where to be seen in all of this, which comes as a surprise to me.
Price erosion for these the low end of the market chips will act like a catalyst for reducing prices on the higher-end chips. Intel's new Katmai chip, designed for higher performance PCs, scheduled for release in the first quarter of 1999, will debut at under $600, a relatively low price point for a new Intel chip. AMD will have a 400-MHz version of the K6-2 in the fourth quarter, and might even be able to produce a small number of its next-generation K6-3 chip, with integrated "secondary" cache memory prior to the end of this year.
These price cuts have got to hurt all microprocessor companies. Intel, the runaway marketshare leader, may lose some margins as AMD comes on stronger. However, as AMD gains market share, the ensuing profits may not be there. AMD's CEO, Jerry Sanders has said that AMD needs its processors to have an ASP (average selling price) of at least $100. Estimates are that AMD's current average selling price is around $80 to $90, just like last quarter when they reported a financial loss.
Intel is expected to report a rise in 3rd quarter revenues, compared to the previous quarter and the same quarter a year ago. Earnings will most likely be less than a year ago. Intel will announce its earnings on October 13.
IBM will Exit Intel type chip market
IBM looks to be the first casualty of the low-cost microprocessor wars. IBM will discontinue its line of 6X86 MX processors as a result of the termination of its foundry agreement with National Semiconductor. The chip has been used in Aptiva consumer computers sold in Europe and Canada as well as domestically from regional dealers like Tiger Direct. IBM will no longer have access to the chip designs of Cyrix, the microprocessor division of National. The IBM 6X86 MX chips is based on the Cyrix 6X86 MX chip design architecture. National Semiconductor announced that it is terminating its foundry chip manufacturing deal with IBM. The termination will be complete by the end of the year. Under the Cyrix foundry arrangement, Cyrix owned specific chip manufacturing equipment inside the IBM processor foundry.
National Semiconductor's agreement with IBM to end their semiconductor manufacturing partnership will result in National taking a one-time charge of approximately $50 million to $55 million in the second quarter. IBM will stop the sale of processors designed by Cyrix subsidiary prior to the end of this year, Cyrix will be no longer be obligated to its wafer purchase agreement to IBM, and Cyrix will transfer certain assets to IBM.
National announced that it had begun to produce Cyrix M II and MediaGX processors on the advanced 0.25-micron manufacturing process in its plant in South Portland, Maine, and will begin to ship production units based around the 0.25-micron process by the end of the month.
IBM had a license for Intel's intellectual property but did not have its own chip designs. Cyrix had chip designs, but it didn't possess either an Intel license to protect itself from litigation and a factory to produce the chips. National has one of the oldest and most extensive cross-license agreements with Intel in the industry. National is one of a handful of companies that can make a "Slot 1" Pentium II-style chip through its licenses and has an advanced chip manufacturing facility in Maine capable of producing the chips. National previously announced last year that it would transition away from the microprocessor manufacturing at IBM and move it to its own factories, to reduce manufacturing costs.
IBM is not out of the game though. IBM signed a broad cross-licensing agreement with ST Microelectronics earlier this year. ST Micro is working on an Intel clone chip with Metaflow. The deal appears to give IBM access to the chip designs of ST Micro and Metaflow. IBM also has manufacturing agreements with Integrated Device Technology.
END OF PART I
See disclaimer at the end of Part II |
