Commentary & analysis of week's chip news, Sept. 3-7
Greetings from Down-East Maine, where new signs of optimism from U.S. business publications make me want to hunker down even more. Some sharp investors figure these kinds of stories are either late or off the mark, so they quickly dump their stock in companies that are mentioned. I for one got nervous this week after reading a bullish article on the chip business in BusinessWeek Online.
After wringing his hands about the present state of chip stocks, the writer suggests some bright spots in the current chip market. One is the "explosive growth of chip-laden DVD players." Upgrades of digital set-top boxes also have set off a wave of demand for cable-box chips offering new features such as Internet access and personal video-on-demand recording, BW Online reports.
And the good news doesn't end there. An average cable set-top box costing $200 contains as much as $80 worth of chips. The likely beneficiaries are LSI Logic, STMicroelectronics, and Texas Instruments.
Next year, chips used in wireless LANs will likely steal the spotlight, BW Online says, because the wireless LANs are catching momentum. Starbucks Coffee has already installed wireless LANs in 500 of its coffee shops and so have many college campuses, airports, and train stations, according to the story.
For makers of wireless-LAN chips, growth is expected to be explosive. About 7.7 million wireless-LAN chips will be shipped in 2001. But by 2005, that figure will increase fivefold, to 46.3 million units. "Every cable or DSL user holds the potential of three to four wireless-LAN chips in the home," BW quotes TI's home networking manager.
As cell-phone and PC-chip markets recover next year, sales of PCs and wireless phones, flat this year, could start growing again, BW Online says. Sales of cell-phone chip sets should grow from $14 billion this year to $30 billion by 2005, according to that optimist researcher, Cahners In-Stat.
And a wave of corporate upgrades, as well as the deployment of Microsoft's new operating system, Windows XP, could fire up demand for PCs, according to BW Online.
I never have been able to call market turns, so I don't know how semiconductor stocks will fare over the next year or so. But I don't think business is going to pick up generally for the chip industry or the chip production equipment industry for another year. And I do hope I'm wrong.
Why I am still a bear
on HP-Compaq merger
I wrote this commentary and the headline too on Tuesday before the financial community dumped on this merger. It certainly wasn't meant to be a me-too piece; I was surprised how strongly analysts reacted to this week's Hewlett-Packard-Compaq merger disclosure.
"I don't see the sense in it," declares Martin Reynolds, Gartner Dataquest analyst. "I think it's a desperate act by two struggling management teams, to do something, anything, to find a way forward." That's a bit strong, but I certainly don't believe this was a marriage made in heaven.
More often than not, big mergers don't work. For decades, I've been watching major electronics industry acquisitions fall flat on their face. Take the computer business: Remember Burroughs and Univac--two formerly great computer makers? What about AT&T and NCR?--what a disaster! And how about Compaq and Digital Equipment? DEC who?
Why don't they work? A clash of cultures is one of the biggest reasons. I suspect this, as much as anything, will hurt the merger of HP and Compaq, which certainly surprised everyone this week. Integrating the Texans with Palo Alto will be one tough job. Morale already is bad at both companies.
HP, one of the all-time good companies to work for under Bill and Dave, is further diluting what was once a great company. That HP no longer exists. Thank you, CEO Carly Fiorina. Like most big mergers, a lot of people are going to be fired--at least 15,000. And that's on top of the same number of folks that already were offed by the two companies this year. Morale must be awful. I'll bet you don't even remember that HP once had a NO layoff policy.
(See Sept. 4 story.)
Selling chips to 'new HP'
will be a lot tougher job
Big is not necessarily better for Hewlett-Packard or Compaq's shareholders, employees, or vendors. Peddling chips to the new HP, for example, will be like selling parts to GMC or Ford. You will be quoting down to the penny in lots of a million or more for three years out!
This puppy is one big OEM and will certainly be pushing its chip vendors even harder than either company is now. With $87 billion in annual sales, the new HP will be nearly as big as IBM in computer revenues. The new HP initially will have more than 14,5000 employees, but expects to save $2.5 billion annually by eliminating the redundant 15,000 people and product lines.
The $25 billion stock swap folds Compaq into HP and creates the world's largest supplier of computer servers, PCs, handheld units, and imaging and printing peripherals. So instead of getting out of the PC business--like some analysts were pushing for--HP will move up instead to become the world's largest PC company.
The new HP will be made up of four operating units: A $20 billion imaging and printing operation, a $29 billion PR and handheld unit business, a $23 billion unit including servers, storage and software, and a $15 billion services business. HP shareholders will end up owning nearly two-thirds of the new Palo Alto company, whatever that is.
(See Sept. 5 story.)
July gets worse, numbers
don't signal turnaround
Time's running out if chip sales are going to turn around this summer as many predicted. The July figures weren't any help. In fact, business may even be getting worse, since the year-to-year comparison is not improving. If the picture doesn't get any better in August, that could pretty much confirm my late 2002 scenario for good times in the chip business.
Chip sales were down again--a huge 37% from a year ago and more than 6% from June, according to the SIA. July sales amounted to $10.9 billion, down from $17.3 billion in July 2000 and off from June's $11.6 billion, which were off from May's $12.7 billion.
The SIA is still its optimistic self, and still are predicting a bottoming out in the September quarter. "The inventory reduction accelerated in the second quarter," says George Scalise, SIA president. "This--combined with improving order levels--supports our view that the inventory correction will be largely completed in the September quarter."
"Sales of personal computers, communications products, and a variety of hand held devices, including newly introduced digital audio products, will accelerate demand for a broad range of semiconductors," Scalise predicts. This will "lead to a return to sequential growth for the industry in the December quarter," he maintains, repeating the trade group's expectations for a late 2001 uptick in chip sales.
The Americas was the worst performing region on a year-to-year basis. July chip sales collapsed by a whopping 51.2% to $2.7 billion, falling 7% from June' shipments. European chip sales fell 34% from a year ago and nearly 10% from June. Japan was a little better, while the world's largest chip market, the Asia Pacific region, dropped 30% to $3.1 billion a year ago and 3.5% from June, according to the SIA.
(See Sept. 4 story.)
UMC to build wafers
for fabless Conexant
Conexant Systems became a fabless chip company this week, as far as its primary business was concerned, as it follows through on its plan to uses outside foundries to fab its wafers and pull out of internal production of digital CMOS chips.
The Newport Beach, Calif., firm, formerly Rockwell Semiconductor, signed Taiwan's United Microelectronics to a five-year deal as its principal supplier of silicon foundry services for advanced CMOS semiconductor processes.
This chip business generated $164 million in sales during Conexant's latest fiscal quarter, or 80% of its entire chip business, which includes wireless, infotainment, broadband home Internet access, and personal computing products.
"We will no longer be required to make the research and development and capital investments associated with advanced CMOS process development and manufacturing," says CEO Dwight Decker. "Instead, we will be able to focus our resources on the design and marketing of innovative semiconductor solutions for wireless communications and broadband access applications."
Conexant will continue to invest in specialty-process manufacturing such as gallium-arsenide and silicon-germanium technologies. The chip company will continue making products for Internet infrastructure systems, including wide-area network (WAN) transport, multi-service access, and broadband access gear. These products generated $36 million in sales in the latest fiscal quarter.
(See Sept. 4 story.)
Good news: IDC finds chip
market rising 29% annually
Here's an emerging chip market that's expected to grow at a 29% compound annual growth rate between now and 2005, according to International Data Corp. Now, if we can only find a couple of dozen more just like it.
Worldwide chip revenues for 2.4-gigahertz, wireless local-area-networks will jump 53% to $216 million from last year, IDC predicts. The emergence of 5-gigahertz wireless networks will fuel growth here after this year. But, cautions Ken Furer, IDA analyst, "the WLAN industry is still very young and has yet to prove itself."
The dominant supplier now in the 2.4-gigahertz WLAN chip market is Intersil, according to IDC. In hot pursuit, though, are Agere, Cirrus Logic, National Semiconductor, Proxim, Philips, Texas Instruments, and STMicroelectronics. These suppliers, and aggressive startups such as Atheros, Envara, and Resonext, are gearing up now for the 5-gigahertz wireless LAN segment, IDC says.
But to succeed in this business, chip companies will have to move quickly down the learning curve. "As the WLAN semiconductor market matures, products will become more standardized and cost reduction pressures will intensify," Furer notes. "This will make it even more imperative for vendors to produce low-cost solutions." Was it ever thus?
(See Sept. 5 story.)
Intel says business running
as predicted 2 months ago
No big surprises from Intel late Thursday. The chip giant told Wall Street that its third-quarter revenues will be "slightly below the midpoint" of its target range of $6.2 billion to $6.8 billion.
I guess that means around $6.4 billion, which, according to Thomson Financial/First Call, was what the Street was expecting. It will report third quarter results on Oct. 16.
The big microprocessor maker says its microprocessor business continues to follow seasonal patterns, with its flash and communications businesses running about as the company expected two months ago.
Intel says its gross margin will be slightly below the midpoint of the targeted range, which Intel had put at around 47%. Expenses are expected to be from $2 billion to $2.1 billion, lower than the targeted range of $2.1 billion to $2.2 billion.
Intel reported net income of $2.5 billion, or 36 cents a share, in the third quarter a year ago on revenues of $8.7 billion. Excluding one-time charges and acquisition costs, its net profit hit $2.9 billion, or 41 cents a share in the third quarter last year. If Intel doesn't get hit with any surprises, it probably will report that revenues declined 26% and per-share earnings falling 75%.
(See Sept. 6 story.)
looks a wee bit better
Never let it be said that my local chip maker ever lets an opportunity slip by to put out good news. But during these days of a chip recession, it's a delight for me to write about any good news.
Fairchild Semiconductor this week raised its third-quarter forecast because of improving order rates. "Our bookings for the first two months of the third quarter are tracking ahead of our bookings run rate during the second quarter," says CEO Kirk Pond. As a result, the Maine chip maker has improved its outlook slightly for third quarter sales; it figures sales will fall 15% sequentially rather than the 15-to-20% it previously forecast.
Another positive note: Fairchild has seen more strength in its "turns bookings," which are new orders shipped in the same quarter they were booked. Turns bookings "have been fairly strong through July and August," Pond says.
And he cites other signs that indicate the downturn should hit bottom for Fairchild in its current quarter ending Sept. 30. "Our book-to-bill ratio for the third quarter is hovering near 1:1, up from the 0.7:1 levels we've had for the past two quarters," he notes. "Our 26-week backlog, which had been declining since last November, stabilized in late July, and has climbed slightly during the quarter," Pond says. The company's 13-week backlog, a measure of demand for the next three months, turned up in early July and has climbed ever since, Pond says.
But pricing pressure will continue to squeeze Fairchild's gross margins, adds CFO Joe Martin, and he now expects them "to be at the low end of the 20-to-22% range guidance we provided previously for the third quarter."
(See Sept. 6 story.)
'Focus of global chip making
will shift to China over decade'
Taiwan Semiconductor Manufacturing isn't wasting any time in starting its expansion into China. Within the next two months, the silicon foundry will open its first office there.
This week TSMC chairman Morris Change says he will send some of his executives into China to look into market opportunities. His comments came just days after TSMC changed direction and Chang said "the time is coming very soon" for the giant foundry to invest in China and take advantage of its lower production costs and giant market.
"The focus of global IC manufacturing will be shifting to China over the next decade," Chang said this week. And, he notes: "The industry will be driven by China whether or not Taiwan participates."
TSMC's biggest competitor, Hsinchu-based United Microelectronics, also has decided to look into expanding in the Chinese market. Chairman Robert Tsao already has led a group of UMC executives to China.
Both giant foundries also are attracted to China's booming IC design industry, which is expected to grow rapidly due to an abundant supply of engineers and strong domestic demand in telecom products and PCs.
But TSMC won't be building any big fabs anytime soon, observers say. TSMC is building 300-mm wafer plants now rather than any of the smaller 200mm facilities, says Connor Liou, analyst with SG Securities in Taipei. "And you can't build a 300-mm plant in China now," he says, "as the U.S. still bans imports of advanced manufacturing equipment to the mainland."
Another reason why TSMC won't be building new fabs in China anytime soon is that this year's semiconductor market will drop 25% to 30% from last year, Chang says. "It will probably take until 2003 before the industry recovers" to where it was in 2000, he adds.
(See Sept. 4 story.)
PLD bookings rise slightly,
'first sign of life in over a year'
Programmable logic suppliers--buried under an avalanche of excess inventory earlier this year--are now seeing a little daylight. A slight increase in bookings indicates that OEMs have worked down their programmable logic and FPGA inventories and are now replenishing their reserve stocks, says analyst Christopher Danely at Merrill Lynch.
"We're seeing the first signs of life in North America in over a year," Danely says. "It's still early, it's still small, but it's definitely an inflection point." He figures inventory replenishment is likely to drive up revenue for a couple of quarters, though it could stall again next year when OEMs wait for end-demand to return.
Programmable logic is typically the first chip segment to recover from a downturn because lead times are much shorter than standard application-specific communications ICs, Danely says.
No true turnaround can be called, though, until all the surplus is eliminated, according to Thomas Weisel analyst Eric Ross. "Yes, ordering has resumed, particularly for newer devices, but order levels are extremely low," he notes.
"In the older stuff, we haven't seen any movement," Ross adds. That's because the OEM and EMS channel is still staring at a $500 million glut of communications components, the equivalent of about 10% of total programmable logic sales in 2000. Yep, it will be a long cold winter.
(See Sept. 4 story.)
Hanging on by its fingernails, Hynix
may be getting money to stay afloat
I'll probably have to rewrite this item about South Korea's Hynix Semiconductor. That the very troubled DRAM giant is in a dynamic situation is the understatement of the year. Earlier this week, it appeared that the former Hyundai Electronics was given a cash transfusion so it could remain afloat--at least for now.
Reuters said that a financial advisor for the cash-strapped Hynix reportedly had come up with $391 million to keep the big DRAM producer afloat. According to the news service, Salomon Smith Barney--a financial advisor to the Seoul chip maker--came up with the funding as part of a rescue plan.
But it's not certain whether this money will be sufficient to save the debt-ridden Hynix. There are now fears that Hynix could default on its loans, possibly fall into bankruptcy, or even go under.
Creditors were meeting earlier this week to discuss a rescue plan worth more than 5 trillion won, but these folks had not invested any additional funds in the chip maker as yet, according to Reuters. The reason, according to officials at the Korea Exchange Bank was that creditors needed more time to decide if they would join the rescue plan.
(See Sept. 3 story.)
Wishful thinking? Semico sees
three years of 29% chip growth
Here's another bullish market researcher who isn't giving up on a turnaround in the current quarter. There already are some positive signs in the market, declares analyst Jim Feldhan of Semico Research. With the PC and other end-user markets showing a "slight uptick," he says the global chip business should show some "improvements in the later part of the third quarter and fourth quarter."
The Phoenix firm sees next year kicking off three straight years of good growth: 23% next year, 21% in 2003, and 29% in 2004 to hit $303 billion. "By 2002, a lot of the excess inventories in the works will also be burned off," Feldhan says. And the market for microprocessors, digital signal processors, and embedded controllers should also perk up. Price cutting now going on in MPUs will drive up the demand for PCs in the marketplace, Semico says.
This year is a disaster, of course. The global market for standard logic ICs is expected to fall 18% to $51 billion. The total MOS memory market will drop 38% to $31 billion in 2001, but should rebound by 12% to $34 billion in 2002, Semico predicts.
(See Sept. 5 story.)
Why is On Semiconductor
like Hynix? Long term debt
South Korea's Hynix Semiconductor isn't the only big chip maker now struggling with billions of dollars of long-term debt. On Semiconductor, which was spun off from Motorola two years ago in a $1.6 billion leveraged buyout by Texas Pacific, is faced with having to repay nearly $1.3 billion of long-term debt.
And the task has gotten a heckuva lot tougher. The chip recession has exacerbated On's cash flow problems and forced the financially strapped chip maker out of compliance with the terms of its lending agreements. So the company was forced to negotiate a waiver and amendment to its credit terms to get back into compliance.
On is not expected to turn profitable until next year at the earliest, so observers are now wondering if parts of the company will be sold. "You'd be acquiring a horrific balance sheet, so no one will buy the whole company," maintains Brian Marshall, analyst at J.P. Morgan Chase. But "I wouldn't be surprised if they sell off a division or a plant."
Analyst Tore Svanberg of Robertson, Stephens wouldn't be either. He speculates that companies with discrete semiconductor lines, such as Vishay or Fairchild, might be interested. But CEO Steve Hanson flatly denies that On Semiconductor, or any part of it, is up for sale.
In fact, Hanson doesn't seem to be all that worried. "We're comfortable the company will weather its way through the downturn." He expects to generate enough cash to repay the bulk of the debt starting in 2005.
Repayment will be done between 2005 and 2010 through a series of graduated balloon payments. Balloon payments always worry me, but Hanson is adamant that the back-loaded repayment schedule was the proper way to handle the debt. "If we had loaded up on paying back the principal up front, we would have been in significant trouble."
On Friday, On Semiconductor announced a $100 million investment by Texas Pacific, which will gain a couple of extra seats on the chip company's board of directors. The investment was required by lenders as a condition to amendments and waivers to On's credit agreement.
(See Sept. 5 story and Sept. 7 story.)
National chalks up higher
bookings and turns orders
National Semiconductor did what most everyone thought it would do in its fiscal quarter ended Aug. 26, but there were a couple of bright spots in all the bad news.
Sales fell an awesome 47% from the same quarter last year and dropped 15% sequentially from the previous quarter. The chip maker lost $54.6 million, vs. a $44.2 million net loss in the previous quarter and a $144.2 million profit in the year-ago quarter. But that was almost exactly what Wall Street was predicting.
But the good news was that worldwide bookings rose 13% during the quarter and turns orders showed a two-fold improvement. Orders were up due to increased demand from wireless, display, and PC OEMs. Sales in the current quarter are expected to grow 5%-to-7%.
"The recent improvement in bookings suggests that the worst may be behind us," says CEO Brian Halla. But he still maintains that it's "premature to say that broad-based demand is returning to normal levels." I certainly agree.
(See Sept. 6 story.)
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(Click here for last week's Semiconductor Alert!.)