Chips are falling through the cracks of the slowing economy.
Just like phone makers, solutions providers and operators, chip makers are buckling in what analysts describe as their worst time ever.
Big names like Texas Instruments, Intel Inc. and Conexant Systems Inc. have reflected the sour times in layoffs, earnings revisions and slides in stock fortunes, chiming in with the big-name vendors that have cracked and occasionally rebounded, sending the stock market into a theatrical frenzy of highs and lows.
“We believe semiconductor fundamentals in early 2001 are much worse than in 1996 and are closer than in the mid ’80s,” commented Dan Niles of Lehman Brothers.
“In 1996, the demand issues for the semiconductor industry were limited to the PC end-market, while wireless and networking were showing strong growth,” said Lehman Brothers in a report on semiconductors.
“Today, all three of these end-markets are decelerating with the fastest-growth markets of wireless and networking decelerating the fastest,” the report continued.
Niles’ comment was in the context of a Lehman Brothers report called “Q2 outlook-2001 worst year ever for semis,” in which the analyst firm predicts an 18-percent to 20-percent drop in revenues year over year, potentially recording the worst fortunes since 1985.
The report predicts that the industry will head downward for most of this year, and a rebirth may not happen until 2002.
With inventory still high and demand predictably low, Lehman Brothers’ analysts think that pricing will drop. Most suppliers have had long-term relationships since the economy took an upswing. The fear, says the report, is that most customers may want to pull out of the deals, and this may force the chip makers to renegotiate prices.
“Also, the bigger the customer,” said the report, “the less it makes sense to annoy them today and have them walk away later.”
He said they have not renegotiated pricing yet, and that factor will come into play in the third and fourth quarter of this year.
Lehman lowered its estimates on Intel from 70 cents to 65 cents against the consensus of 66 cents, predicting a decline in operating gross margins for the next two quarters.
The analyst firm said that it would be surprised if Intel does not lower forecasts by at least $1 billion for this year, because “much of the leading-edge equipment being bought today could be purchased at 30 to 50 percent less in a year with much better reliability.”
The fortunes of Texas Instruments are not looking up in Lehman’s eyes, either. Lehman reduced its estimates from 75 cents to 65 cents, although the consensus is 74 cents. It said semiconductor revenues for the second quarter may slump in all end-markets and geographies, blaming it on high inventory levels and falloff in digital consumer products.
Lehman observes that weaknesses at L.M. Ericsson and Nokia Corp. will drive down the wireless outlook for the second quarter, noting that Nokia shows the greatest signs of turning around.
TI showed first signs of trouble when it announced in February that it would idle its Santa Cruz, Calif., plant, which it later closed permanently. That announcement was in response to a decline in the hard-disk drive business. TI also announced in March that it would lay off 600 workers, about 1.4 percent of its staff.
The company also said it expected a 20-percent decline in first-quarter sales. Analysts believe that its fortunes may be related to the declining fortunes of its main customers like Motorola Inc., Ericsson and Nokia, which have cut costs, laid off workers and revised estimates.
“A lot of cell phones have piled up in its channels,” commented Niles. “It will be problematic for the company to improve revenues from March to June as inventory issues work themselves out,” adding that the entire wireless sector has declined 30 percent.
Conexant Systems laid off 1,500 employees in March, which amounted to 20 percent of its staff. Its rival PMC-Sierra also announced a cut in its earnings expectations and eliminated 230 jobs, or 13 percent of its 1,740 employees.
“The slowdown in the global economy and the ongoing inventory correction is impacting virtually all of the communications end-markets we address,” said Conexant Chairman and Chief Executive Dwight Decker.
Other chip makers in unhappy conditions are Broadcom Corp., which reduced its earnings expectation; Pericom Semiconductor Corp., which expects revenue to fall 25 percent in the third quarter; and Vitesse Semiconductor Corp., Applied Micro Circuits Corp. and TranSwitch, which all cut expectations.
“I don’t see a recovery for Texas Instruments, or semiconductors in general, until October at the earliest,” commented Niles.
