First-quarter sales even worse
than they looked a month ago

There's no getting around it. The news wasn't good this week. After nearly all of the chip makers revised downward their first quarter expectations in recent weeks, the first results coming in are even worse than they expected. Cypress Semiconductor, for one, checked in with first quarter sales that were 6% less than was forecast just a month ago--coming in at $262 million.

CEO T.J. Rodgers seemed baffled. "We barely turned positive on bookings with cancellations offsetting virtually every order we received. It is not clear if our customers reduced the inventory positions they were trying to manage, considering that end demand has really slowed down."

The second quarter doesn't look much better to T.J. "We still don't have the visibility, but judging from what we've seen in Q1, we are estimating that the second quarter will be another down quarter in the $200-210 million range," he says.

Wall Street is become increasingly concerned about chip companies not making their latest quarterly figures, according to analysts, and they now worry that market conditions are still getting worse for chip suppliers.

(See April 10 story.)

Motorola Semi
leads the way down . . .

Motorola's problems turned out to be far worse than analysts had figured. This week it surprised Wall Street by posting a net loss of $533 million on slumping sales of $7.75 billion in the first quarter. Sales in the first quarter fell 11% from the year-ago quarter and were down 23% from the previous quarter.

Its chip business was even grimmer. Chip sales in the first three months of 2001 dropped 22% from both the previous and the year-ago quarters to $1.48 billion. And chip orders in the quarter really fell off the cliff--plunging 49% to $1.1 billion from the year-ago quarter.

Motorola Semiconductor suffered an operating loss of $131 million vs. a profit of $128 million in the first quarter of 2000. Chip orders were "down very significantly" in the Americas and Europe, "down significantly" in Asia/Pacific, and "up slightly" in Japan. In its major markets, sales were "down significantly" in standard embedded solutions and wireless products, down in transportation and networking/computing, but up in imaging/entertainment.

And things aren't going to get better anytime soon. Motorola now expects to report another operating loss in the second quarter that could even be even higher than the first-quarter loss. It also expects quarterly chip sales to drop from the first-quarter rate, causing an operating loss for the semiconductor sector that will be more than the $131 million in the first quarter.

In a decision that could end up hurting Motorola down the road, the company is chopping its semiconductor capital spending by a whopping 69% from last year. New plans call for spending of $750 million, down from $2.4 billion in 2000. Most of this year's spending will go for increasing the capacity of its 0.13-micron process.

(See April 11 story.)

. . . But firm looks
for turnaround in 2002

As bad as things are right now for Motorola Semi, the chip maker does see light at the end of the tunnel.

"Continuing volatility in the chip market makes forecasting difficult, with third-party projections changing every week," says Fred Shlapak, president of Motorola Semi. "We currently believe the total industry sales for this year could be as much as 10-to-15% lower than last year. The only market segment we now expect to grow is automotive, at about 4% industry wide.

"We still expect the industry recovery to begin in the second half of this year as customers work off component inventories and adjust to end market demand," declares Fred Shlapak, president of Motorola Semi. But the health of the U.S. economy will continue to be a major factor in chip sales growth later this year and in 2002, he says.

Motorola's market models now show semiconductor sales repeating the last recovery pattern set by the industry back in 1998. The semiconductor chief says that this would mean chip sales would remain "somewhat stagnant" in late summer and early fall, but then begin a "strong increase" in late fall and early winter.

"On this basis," Shlapak says, "we could see semiconductor industry growth next year in a 15-to-20% range."

(See April 11 story.)

Joseph strikes again;
'bottom only months away'

If you get lucky once by taking a contrarian view to where the chip industry is going, can you get lucky and do it again? Jonathan Joseph apparently thinks so. The Salomon Smith Barney financial analyst, who may have been the first Wall Street researcher to predict the current semiconductor downturn last summer, now says that current data "suggests a fundamental bottom is only months away."

Actually, Joseph was more than lucky when he went out on a limb last year. He has a good feeling for the industry, and besides, I agree with him. In the interest of full disclosure, I need to add that he got his feet wet covering the chip industry when he was writing stories for me from Tokyo on Business Week many moons ago.

So this week he upgraded the semiconductor sector from "neutral" to "outperform," because he believes the industry hit a cyclical bottom in unit orders last July, in dollar shipments last August, and in unit shipments in February. Also helping him make his decision was a 30-to-35% cutback this year in capital spending, as well as tighter inventories spreading from PC OEMs to makers of wireless and wireline communication gear.

"Inventories in the PC channel have been brought under control "far sooner" than Joseph expected. "Some of that was reflected this week in PC motherboard data out of Taiwan, which surprised consensus estimates to the upside for the third month in a row."

Nevertheless, he says, business "is really ugly out there now. Conditions at many of our companies are the worst that even old-timers, who been through scores of downturns, have ever seen. If it cannot get worse, it will get better," he declares.

(See April 11 story.)

Group makes last-minute push
to derail ASML-SVG merger

The fight is running still hot and heavy to stop ASM Lithography's deal to acquire Silicon Valley Group. The clock is ticking, though, since a 45-day review imposed by a Congressional committee for national security reasons, will expire by the end of April.

In a last ditch effort, a group led by a non-profit business group and a former SVG executive is trying to block the merger by taking their case directly to President Bush and other high-level government leaders, SBN has learned.

The U.S. Business and Industry Council, which claims to have some 1,500 members, has distributed a tape that explains why the U.S. government should block the proposed merger. The group also sent some 650 copies of the 15-minute tape to members of Congress, the Departments of Defense and Commerce, and other U.S. government offices, confirms Kevin Kearns, council president.

The tape includes comments by Kearns, David Markle, chief technology officer of Ultratech Stepper, and Edward Dohring, retired president of SVG's Lithography Division. A major reason for sending the tape at the eleventh hour is to force the U.S. government review the merger--instead of putting its "rubber stamp" on the deal, Markle says.

"We are a non-profit organization that has no vested interest" in the merger, Kearns explains, "but we're opposed to the deal." He says the main problem involves national security issues, particularly SVG's Tinsley Labs. "Tinsley is the only company in the world that has develop the complete optics for EUV (extreme ultraviolet) technology, the next-generation lithography tool for advanced chips," he adds. If the deal goes through, "this technology will be lost from the U.S. for good," Markle says.

(See April 13 story.)

LSI Logic will close down
fab as it shifts to foundries

What does a chip maker do when it's looking desperately to chop overhead? Well, if business has tanked like it has now throughout the industry and the company already has decided to reduce its own manufacturing and buy more processed wafers on the outside, the best bet is to look for one of its old factories to close down.

That's what LSI Logic says it's going to do: close down an 8-inch wafer fab in Colorado Springs, Colo., and take a $120-to-$150 million charge. The August shutdown will reduce the company's workforce by as many AS 7%, or 500 employees. But some will be offered transfers, the company says.

LSI Logic acquired the old fab in 1998 when he purchased Symbios from Hyundai Electronics America. The chip maker, which plans to increase the purchase of processed wafers from foundries to nearly one-third of its total production, is consolidating its own manufacturing at its two major sites in Gresham, Ore., and Tsukuba, Japan.

(See April 11 story.)

Atmel sees turnaround
resuming as early as Q3

At least one chip maker is still looking for a turnaround by as early as this summer. Atmel reported first quarter revenues of $525 million--nearly 9% lower than sales in the previous quarter. But it does expect sequential growth to resume in the second half.

"We believe that Q2 sales will be slightly lower on a sequential basis-in the mid-single digit range," says CEO George Perlegos. "However, with our broad product portfolio, we believe that growth in our business should resume for Q3 and Q4 of 2001," he predicts.

(See April 12 story.)

First-quarter sales tank too
at world's largest foundries

The first-quarter news out of Hsinchu isn't much better. The world's two largest silicon foundries say their revenues were more than 25% lower than the previous quarter.

Taiwan Semiconductor Manufacturing (TSMC) reported a 26.6% drop in first-quarter sales from the fourth quarter last year, while United Microelectronics (UMC) said its first-quarter revenues declined 25.9% from the fourth quarter. TSMC's quarterly revenues were $1.2 billion and UMC's hit $718 million.

(See April 9 story.)

Full-scale prototype system developed for EUV lithography

Chip makers--including an anxious Intel CEO Craig Barrett--may get their production lithography system using extreme ultraviolet (EUV) earlier than they had expected.

In February, the EUV consortium developing the new tool demonstrated its alpha prototype tool up to nine months ahead of schedule and predicted production systems would be available by 2005. But this week they announced completion of a full-scale prototype lithography system and said they were accelerating the development of beta prototype tools so they'd be ready for EUV process development by 2003. The Intel CEO says he expects the EUV production systems to be ready by 2005, but he'd like to see them a couple of years earlier.

EUV technology has become the leading candidate for next-generation lithography. But EUV proponents believe that extreme ultraviolet lithography can be ready earlier than competing approaches for volume production fabs later in this decade. "Our next step is to transfer the technology to lithography equipment manufacturers to develop beta and production tools," says EUV LLC's program manager Chuck Gwyn.

(See April 11 story.)

Analog Devices sees modest
turnaround coming this fall

It's getting more painful for Analog Devices too. Less than two months ago, the Norwood, Mass., chip maker cut its sales forecast for the quarter ended May 5 to a sequential drop of 6-to-8%. This week it slashed its prediction to a 20-to-22% sequential drop to $600-to-620 million. And it expects the quarter ending in August also to show lower sequential sales--down about 5%.

But the analog chip maker says it now looks like its fiscal third quarter ending in August could be the low point in the current downturn and the following quarter showing "a modest sequential increase" in sales.

Most of Analog Devices' problems come from "substantial decreases" in shipments to the big guys, it says, not the smaller companies buying through distribution. This business, which comes from tens of thousands of end customers worldwide, is expected to flat with the February quarter

(See April 12 story.)

IBM's RISC-processor platform
cuts cost and development time

IBM weighed in Friday with a new platform that it says will slash by 90% the number of chips needed to connect a system to the Internet.

IBM is applying a range of semicustom ASIC designs to the new Power PC-based platform to create customized system-on-chip designs. The new RISC-processor platform, IBM claims, will enable custom ICs to be produced without the long development cycles and high costs that are usually associated with system-on-chip designs for low-cost consumer Internet products.

"The one-size-fits-all days of PC microprocessors are over," maintains Scottie Ginn, vice president. "With PowerPC IAP, manufacturers can design a chip to fit their product, rather than limiting their product to what a standard chip will allow."

The chip maker predicts the new processor platform will make possible lower cost Web phones and many other new kinds of consumer information appliances. The platform also is designed to "significantly reduce" the power consumption of smaller, portable products.

(See April 13 story.)

Philips finally fills
key management job

A key management job that has been vacant for nearly five months was finally filled this week by Philips Semiconductors. Mario Rivas, a 19-year veteran of Motorola Semiconductor, is joining the chip maker to head up its chip manufacturing and foundry strategies.

As EVP in charge of operations, he succeeds Stuart K. McIntosh, who surprised the Dutch company last fall by taking over as president of ASM Lithography's lithography division. Weeks after McIntosh's departure, Philips Semiconductor chairman Arthur van der Poel told SBN that they were close to naming a successor to McIntosh. But nothing happened until now.

Rivas couldn't be coming at a better time. Philips currently faces a bunch of challenges as it tries to maintain its growing use of third-party silicon foundries yet still launch leading-edge processes in its own 300-mm fabs. Prior he left Philips, McIntosh had said Philips planned to announce a new 300-mm fab during the first half of 2001, but it is not clear whether Philips will still do this. It had been expected to locate the giant fab most likely in the Netherlands.

(See April 13 story.)

As processing gets more costly,
fabless ASIC vendor is coming

A new breed of ASIC supplier is emerging. ASIC vendors historically have emphasized their wafer-processing technologies to gain a competitive edge in the marketplace, but times they are a changing. More and more of them are being forced to pursue a foundry strategy as the cost of wafer processing becomes more expensive, according to Dataquest.

"The key advantage of the 'fabless' ASIC company business model is that it transfers a number of the fixed costs that are associated with a traditional ASIC company to third parties," points out Bryan Lewis, Dataquest's chief analyst for ASIC research. "Those charges are then charged back to the fabless ASIC company in the form of variable costs that occur when a particular facility, such as fabrication or packaging, is used." Lewis says that this approach "avoids the capital burden of owning foundries and packaging plants and developing process technology."

An example of this shift to foundries was LSI Logic's decision to develop a 0.13-micron copper process technology with Taiwan Semiconductor Manufacturing and shift more than 30% of its capacity to third-party fabs. Last year only about 6-to-8-% of the LSI Logic's wafers were processed by third-parties.

The development of e-commerce tools and the rising use of the Internet have provided a global communications and commerce backbone that make it much easier for these new fabless ASIC companies to create "virtual IC delivery teams" from partnerships of independent companies, Dataquest says.

(See April 9 story.)

Intel-AMD speed race
goes on, but profits suffer

Even though it appears that only the analysts and business press are paying much attention these days, Intel and Advanced Micro Devices continue to battle it out in the microprocessor speed race.

Intel will unveil its 1.7-GHz Pentium 4 chip in a few weeks and take back the speed lead, but AMD is expected to come back with a 1.4-GHz or faster Athlon processor in a few months, according to industry sources.

The rapid introduction of new higher-speed processors also brings faster price cutting too. Intel is expected to cut prices next week on its existing family of Pentium 4 processors by about $65 each, heating up the competition with AMD in the high-performance market. The 1.5-GHz Pentium 4 is expected to drop to the $560-$565 range, the 1.4-gigahertz model to the $375-$380 range and the 1.3-GHz chip to $265-$270.

And by the end of May, Intel is expected to announce another round of price cuts for the microprocessors. "Clearly Intel is cutting Pentium 4 prices to spur demand and help ramp the processor in the market," says Peter Glaskowsky, processor analyst with MicroDesign Resources.

While he acknowledges that production costs drop as yields increase, Glaskowsky believes that the big Intel price cuts "are beyond any manufacturing cost savings. They will cut heavily into the Pentium 4 profit margins, as Intel does everything it can to establish it in the market," he predicts.

Surprisingly, the MicroDesign analyst believes that Pentium 4 profit margins are running below the much lower-priced Pentium III chips. He says that in the early stages of a new product life cycle, one would expect just the opposite, with the Pentium 4 chips selling at high margins. That's what competition does, I guess.

(See April 9 story.)

Sharp's U.S. design center
picks UMC for prototyping

Sharp's U.S. semiconductor division has picked Taiwan's United Microelectronics for prototyping services. First job will be to quickly turn out Sharp's new 0.18-micron microcontroller and system-on-chip designs.

Sharp's new U.S. design center in Camas, Wash., is designing the new microcontrollers and system-on-chip. The decision to operate a design center in North America is a departure for Sharp, which until now has designed all of its products in Japan. The Camas center selected UMC's Silicon Shuttle program, which packs multiple IC designs on a single wafer to share costs, speed prototyping, and "do silicon 'respins' quickly and efficiently when required," explains Terry Thomas, Sharp marketing director.

The new Sharp design operation is creating a new class of 16- and 32-bit microcontrollers and system-on-chip ICs aimed at next-generation PDAs, Internet appliances, smart phones, and home automation. These ICs will be based on UMC's 0.18-micron process.

(See April 9 story.)

VC-backed EDA vendor
lays off staff to go public

Whattaya do after you get $90 million in venture capital funding to start your company and now you want to go public? You start slashing staff and costs, especially right now. Sound weird? Well that's exactly what's happening at EDA startup Magma Design Automation, which is in the midst of a painful transition.

The Cupertino, Calif., start up has laid off nearly 25% of its staff, EE Times has learned. Roy Jewell, Magma's new COO, confirms the layoffs, but insists that revenues and backlog remain strong.

Jewell denies the cuts were related to disappointing sales or revenues. The developer of the Blast Fusion IC physical design system enjoys a very strong backlog and expects to be "very strongly profitable" by the fourth quarter, Jewell claims. "We're doing what other companies in the Valley are doing--focusing on the biggest return for the effort and not trying to be everything to everybody."

The venture capital funding is probably the largest amount that's ever gone into an EDA vendor. "Part of my charter was to take a company that had been very heavily funded on the venture side, and position it to be publicly sustainable in the future," Jewell says. He confirms Magma is now moving closer to an initial public offering.

Magma' original funding followed a "dot-com model, where you spend and grow top line at the expense of short-term profitability," Jewell notes. "What we've tried to do is make the company much more responsible from a shareholder point of view and get profitable in a shorter period of time." The cuts, which apparently began after Jewell took the COO position last month, leave Magma with just under 200 workers. The cuts were made "across the board" and included reductions in Magma's U.S. sales force and support staff.

(See April 9 story.)

Seiko Instruments invests
in Malaysia's Silterra foundry

Seiko Instruments has become the second major chip company to invest in Silterra Malaysia after LSI Logic. This week the foundry startup reported that the Japanese company will invest more than $50 million in its operations as part of a 10-year wafer processing agreement for the Malaysian foundry to supply 0.25- and 0.18-micron digital CMOS to Seiko.

Silterra began producing its first revenue-generating wafers during the first quarter at its $1.5 billion fab in Kulim. The 0.25-micron process technology came from LSI Logic. It is now getting ready to qualify a 0.18-micron technology from LSI Logic.

"We will be supplying Seiko with 0.25- and 0.18-micron digital logic . . . for a variety of applications," says Steve Della Rocchetta, marketing EVP. "The partnership with Seiko involves an equity investment and a buy/sell relationship, but there is no exchange of process technology."

Silterra officials see the Seiko deal as a key first step into Japan, and they hope to strike other foundry deals with chip makers there shortly. Malaysia's other chip-foundry startup--1st Silicon (Malaysia) on Borneo--already has licensed a 0.25-micron CMOS process from Sharp, which plans to use 1st Silicon as a major foundry source.

(See April 10 story.)

If you have any comments, criticisms, or questions, don't hesitate to E-mail us at bhenkel@aol.com. Have a great weekend!

(Click here for last week's Semiconductor Alert!.)