Jan. 19, 2009 – Ahead of keenly anticipated 4Q08 results that will set the stage for how long the industry’s dark winter will be, two analysts are casting their vote for chips and equipment, suggesting the former will touch bottom in 1H09, while the other thinks bad times will persist longer than feared.
“We believe a fundamental bottom will form in 1H09 for chip suppliers, and that customers will replenish component and device inventories sometime this summer,” writes Craig Berger of FBR Research, in a recent report. He sees shipments (and thus sales) declining -16% in 2009, after a -2% decline in 2008, pushed down by a seasonally slow 1H09, but a “snapback” in 3Q will push 2H09 to better than seasonal.
“It is clear that the global recession is negatively impacting unit demand for all types of devices,” he writes, adding that chip content per device will also be pressured by tight-fisted consumers. And lower sales might cause some chip suppliers to try and spark competitive pricing in order to win designs and market share.
Key technologies driving demand include:
– Netbook demand was a primary source of strength in 2008, and we expect netbook demand to remain robust in 2009,” Berger writes. He projects a -2% decline in PC units, but -12% if you take out the netbook segment, which he thinks could quadruple or more to 35-50M units in 2009. He also points to a continued shift to portable PCs, and continued corporate push to distributed computing.
– Handset chips will drop about -5% in 2009 to 1.17B units, following significant consolidation in 2008 (Ericsson/ST-NXP Wireless JV, proposed sales of TI’s and Freescale’s baseband units). Look for “very aggressive pricing” and more consolidation as companies who don’t have key IP such as Bluetooth, GPS, Wi-Fi, mobile TV, video processing, and power management to be “marginalized.”
– Prepare for a proliferation of wireless technologies, especially 3G, as “the world ‘unwires’ itself,” Berger writes.
– Look for even more content to be delivered digitally/online, notably video and more social network, which will pump up demand for servers, storage, and networking equipment used in ever bigger hosting-based server farms.
Berger notes that perhaps the most sustainable business is in analog and power discretes, with applications in battery life and mobility, and also with low capital expenditure requirements and high depreciation. On the other end of the scale, memory (both DRAM and NAND flash) will continue to suffer as key players reign in spending and output, and pricing and profits remain squeezed tightly.
Equipment firms: “Abysmal” conditions to persist
Think 4Q08 was bad? Wait until companies report for 1Q09, warns Deutsche Bank analyst Stephen O’Rourke. The key to watch, he says, is not the depth of the current downturn, but the duration. “The near-term abysmal industry conditions will likely persist longer than many think,” he warns. He projects a -37% decline in semiconductor capex in 2009 — a number that is “biased quite negatively” — and he sees no signs of recovery until 2010, and even then it’ll be “very modest.” Recent pickups in memory pricing are not a bounce, he noted, but rather a reflection of widespread shutdowns over the holiday period. “We hardly see a balancing of memory supply and demand,” he writes. And even when memory pricing creeps up to the neighborhood of costs, memory suppliers will simply add capacity they’ve taken offline, which will require no new equipment.
What does this mean for equipment suppliers? “Weakness is pronounced in memory, foundry and IDM segments, with aggressive spending cuts across the board,” O’Rourke writes. “We believe that the current downturn has yet to trough and will likely last quite a bit longer than past downturns.” Look for more bloodletting in the frontend semiconductor equipment sector, “significantly deeper than in past downturns” — including the early-2000s tech meltdown.
Scanning the smoldering equipment supplier landscape, O’Rourke takes note of the estimated casualties:
– Applied’s diversity will barely maintain breakeven over the next couple of quarters;
– KLA-Tencor will likely lose money for the first time in 15 years;
– Lam Research will see volume purchases “evaporate”;
– Look for yet another warning from Novellus, after two in recent weeks;
– Expect more cost-cutting at Varian;
– Another ~20% layoffs at Mattson;
– Sales at Rudolph won’t recover much at all in 2009 (sales or losses) after a 1Q trough;
– FEI…actually will outperform! Bookings are said to outpace expectations by $20M.
Turning to the automation sector, O’Rourke sees declining revenues at Brooks and Asyst, as OEM shipments slide. Brooks sales could be down “well over 20% Q-Q” with losses lasting through the year; Asyst, meanwhile, is helped by new AMHS orders (~$86M) but the company won’t be spared overall cutbacks in semi and FPD fabs.
Elsewhere, O’Rourke is somewhat more optimistic about MEMC, which should stay profitable as wafer starts stabilize over the next couple of months, returning to “moderate” unit growth. Not so lucky is Cabot Microelectronics; O’Rourke points out that idling memory fabs mean sharply lower sales of higher-margin tungsten and oxide slurries, the impact of which will be felt across sales and margins through 1H09.