Optimism for a significant rebound in corporate IT spending in 2003 has begun to wane, leading analysts to rethink their forecasts for the semiconductor market.
Geopolitical instability has further muddied an outlook clouded by economic uncertainty, and it now looks as though the long awaited IT upgrade cycle will be delayed yet again.
Chip suppliers this week will begin formally weighing in on business levels to date, but analysts indicated that excess capacity and falling average selling prices will bring first-quarter worldwide semiconductor revenue down from the fourth quarter of 2002.
"With war fears and uncertainty about the oil supply, people are jittery," said Bob Swanson, president and chief executive of Linear Technology Corp., Milpitas, Calif. "But I don't know of anybody who isn't predicting that 2003 will be significantly better than 2002."
Indeed, while forecasters are pulling back a bit, the outlook remains generally positive. Phoenix-based Semico Research Corp. last week revised its forecast for the semiconductor market to grow to $173 billion, or 23%. Previously, the research firm forecast revenue would surge 30% on an anticipated boost in corporate spending and average IC selling prices. Semico's unit forecast remains at 16% growth.
The IT upgrade cycle has been slower to materialize than expected, according to Semico.
Meanwhile, DRAM pricing has plunged as vendor inventories increased to one month's supply and demand evaporated, said Semico analyst Jim Feldhan. (See page 3 for related story.) Total semiconductor revenue is now expected to grow only 1% in the first quarter, down from earlier projections of 3% to 4%.
Gartner Dataquest reduced its semiconductor forecast for 2003 to $167 billion, or 8.9% revenue growth, from an earlier projection of 12.1%. The San Jose research firm also cited IC price pressure and a weak PC market.
"Much of our forecast is predicated on a reasonably stronger second half of 2003," said Dataquest analyst Richard Gordon. "But there is significant downside risk. The corporate PC-replacement cycle is the key. Without it, the semiconductor market will likely be on the negative side this year."
With profits restored, many companies are poised to invest in much-needed IT upgrades. But the threat of war in the Middle East is causing corporate buyers to delay spending decisions, analysts said.
Semico's Feldhan believes the trend will be short-lived. But, 60% of IT resellers in the United States surveyed by Thomas Weisel Partners LLC, New York, said they do not expect an IT spending turnaround this year, compared with 35% in December.
"It's still murky," said Tim Southgate, vice president of corporate marketing at Altera Corp., San Jose. "People are being very careful about what they'll invest in. But the more cautious they are, the better for us. When people building equipment are faced with an uncertain market, they are much less likely to invest huge upfront costs for an ASIC, and instead will look at programmable logic."
Southgate said that while the downturn has chilled the communications sector--typically programmable logic's largest revenue base--it has created opportunities for PLDs in nontraditional areas like computer peripherals, storage, and low-end consumer applications.
Design activity has been robust in these segments, particularly in Japan, he said, although he could not quantify design wins in advance of the company's business update, scheduled for this week.
Intel Corp. is expecting a year much like 2002, with revenue momentum coming in the second half of the year, said a spokesman for the Santa Clara, Calif., company.
Intel's business has a seasonal pattern of first-quarter weakness, he said. In January, the company said it anticipates first-quarter revenue to be $6.7 billion to $7 billion, down from $7.2 billion in the fourth quarter of 2002.
The company plans to update its revenue guidance later this week.
While semiconductor suppliers cited poor visibility beyond the current quarter, analysts said pockets of strength exist throughout the industry that will help prop up the market during the remainder of the year. Cellular handsets, for example, are expected to be one of the main drivers of semiconductor consumption, particularly of DSPs, flash memory, and imaging ICs.
The analog IC segment, too, continues on a slow but steady upward course, but slow growth is better than no growth, Linear's Swanson said.
"The market is still very tough. Certainly demand is less than supply. People are working hand to mouth on inventory," he said. "The big unknown is, what is true demand, and when is it going to pick up?"