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Analysis: Grim outlook seen for IC industry

Posted: 03 Nov 2008     Print Version  Bookmark and Share

Keywords:chip makers  semiconductor industry  microprocessors  memory sector 

Based on current guidance from chip makers—especially the industry bellwethers—the fourth quarter of 2008 and beyond looks grim.

Nearly every sector in the semiconductor industry—such as analogue, consumer, industrial, foundry, memory, wireless and others—is projected to see larger-than-expected declines in sales and demand for the fourth quarter and perhaps the first part of 2009.

Some sectors are doing better than others. Some are still above water and showing a profit, but most agree that memory is dragging down the entire ship. Memory, which has been engulfed in a downturn for some time, is not expected to recover until 2010 or so.

It's not all bad news. One of the few bright spots is microprocessors, which could see flattish growth in the fourth period. But in the first quarter of 2009, processor demand could tail off due to a seasonal lull in PCs. The handset market has already slowed, while automotive, consumer and industrial have grinded to a halt.

In fact, there are growing whispers that the current cycle is somewhat reminiscent of the horrific downturn in 2001. The current IC business was already slowing prior to the economic crisis and credit crunch. But now, the key economic fundamentals are quickly crumbling.

Others disagree, claiming the sky isn't falling on the industry. On the other hand, Richard Tsai, president and chief executive of Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), characterised the current climate as a ''severe business environment.''

Silicon foundry giant TSMC (Hsinchu, Taiwan), one of the bellwethers in the IC industry, sees a severe drop in demand in the fourth quarter and projects a downturn in the overall IC industry for 2009.

Amid an IC slowdown and the economic crisis, the worldwide IC industry is projected to fall by a whopping 10 per cent in the fourth quarter of 2008 alone, Tsai said during a conference call this week.

As a result, the overall IC industry is projected to have ''flattish growth'' in 2008 over 2007, he said. Most forecasters project single-digital growth in 2008. In 2007, the IC industry grew by some 10 per cent.

Going forward, TSMC sees a downturn on the horizon. ''2009 will be a challenging year,'' Tsai said. He projects that the overall IC industry could decline from the ''mid-to-high single digits" in 2009.

Clearly, the current economic crisis in the United States and elsewhere could have a ''severe effect'' on the worldwide semiconductor industry, warned Katsuhiro Tsukamoto, president and chief operating officer at Renesas Technology Corp. (Tokyo), the world's largest microcontroller maker. "Consumer demand will drop," Tsukamoto said in a recent interview. Worldwide capital spending ''will slow down.''

The world is flat (for processors)

It's not all doom-and-gloom. In the microprocessor space, the situation appears to be less dire. Wall Street breathed a sigh of relief earlier this month when both Intel Corp. and Advanced Micro Devices Inc. posted third quarter numbers that were better than many had feared.

While both companies described murky fourth quarter conditions, each provided guidance that called for fourth quarter revenue to be roughly flat sequentially, with Intel allowing for the possibility of a noticeable increase.

Based on Intel's fourth quarter revenue guidance of Rs.50,536.75 crore to Rs.54,539.67 crore ($10.1-to-$10.9 billion)—the widest range the company has ever provided—Intel expects the sequential change in revenue to be anywhere from up nearly 8 per cent to down less than 1 per cent. In contrast, AMD is expecting fourth quarter revenue to be roughly flat sequentially with the Rs.7,905.75 crore ($1.58 billion) in revenue it posted.

Neither company is saying much about what it sees beyond the fourth quarter. Intel said it was not yet providing any guidance for 2009.

"We need to see the impact of what's roiling through the credit markets and that's what is giving us the higher range of potential outcomes for revenue in the fourth quarter, and we've got to watch that and then we'll have a better sense for 2009," said Intel Chief Financial Officer Stacy Smith on the company's third quarter earnings call.

Steve Newberry, president and CEO of chip-equipment supplier Lam Research Corp., said on his company's recent third quarter earnings call that the microprocessor segment was the one area that has so far not seen a dramatic pull back in capital spending plans for 2008. Intel slightly lowered its capital spending forecast for 2008 to Rs.25,018.20 crore ($5 billion) from Rs.26,018.92 crore ($5.2 billion), and reduced its R&D spending forecast for the year to Rs.29,521.47 crore ($5.9 billion) from Rs.30,021.83 crore ($6 billion).

Memory lane is painful

While the processor business is relatively stable, the memory sector remains engulfed in a major downturn. Even before the economic crisis, the DRAM, NAND and NOR memory markets have been the subject of oversupply and falling average selling prices (ASPs).

Hit by the memory downturn, Korea's Samsung Electronics Co. Ltd. recently posted a profit of Rs.4,284.62 crore (1.22 trillion won) in the quarter, down 43 per cent from the previous period and down 44 per cent from a year ago. Memory giant Samsung said sales were Rs.67,549.13 crore (19.26 trillion won) in the quarter, up 6 per cent from the previous period and up 15 per cent from a year ago.

''Commentary from Samsung on all business units—semiconductors, TFT-LCD, telecom, digital media—can be characterised as 'below-seasonal,' '' according to a recent report from FBR. ''We expect Samsung to continue to keep the pressure on memory competitors and, thus, we expect (calendar 2009) memory capex to decline by only 10 per cent to 15 per cent year-over-year, versus our estimated memory-industry capex decline of 25 per cent to 30 per cent.''

Samsung is fairing much better than its memory rivals. Hynix, Micron, Toshiba and others have recently posted losses. For example, loss-ridden Hynix Semiconductor Inc. has posted several consecutive deficits. It posted a staggering Rs.5,954.33 crore ($1.19 billion) loss for the third quarter.

Citing ''steeper than expected declines in semiconductor sales prices,'' Toshiba Corp. this week said overall consolidated sales in the second quarter of fiscal 2008 were Rs.90,065.50 crore (1.877.1 trillion yen), a decrease of 148.2 per cent over the like period a year ago. Toshiba posted a loss of Rs.1,327.82 crore (26.6 billion yen).

Due to its NAND flash business, Toshiba posted an operating loss of Rs.1,462.60 crore (29.3 billion yen) in the second quarter, compared to a loss of Rs.1,507.52 crore (30.2 billion) in the first period. In its overall business, Toshiba has yet to revise its forecast.

Mixed picture

In wireless and analogue, it's a mixed picture. Texas Instruments Inc. said on its third quarter earnings call Oct. 20 that it expects fourth quarter revenue of Rs.14,160.30 crore Rs.15,361.17 crore ($2.83 to $3.07 billion), which would be a drop of 9-to-16 per cent sequentially from the Rs.16,962.34 crore ($3.39 billion) that the company posted for the third quarter. Analysts had been looking for TI's fourth quarter revenue guidance to be about Rs.17,012.37 crore ($3.4 billion).

"Our outlook for the fourth quarter is for revenue to decline substantially based on weak order trends over the past few months," said Rich Templeton, TI chairman, president and CEO.

On the foundry side of the equation, business is terrible. TSMC (Hsinchu) said its sales hit Rs.14,930.86 crore ($2.984 billion) in the third quarter of 2008, up 5.5 per cent from the previous quarter and up 4.5 per cent from a year ago. Net profit was NT Rs.4,938.59 crore ($30.772 billion) in the third quarter, up 6.3 per cent from the previous quarter and up 0.7 per cent from a year ago.

TSMC's outlook is gloomy. For the fourth quarter, TSMC's revenue is expected to range from Rs.10,570.94 crore to Rs.10,877.34 crore (NT$69 billion-to-NT$71 billion). TSMC's Tsai projected that the company's wafer shipments would fall by 20 per cent in the fourth quarter.

TSMC has not changed its capital spending plans for 2008. But the silicon foundry giant dropped hints that it will cut capital spending by 20 per cent in 2009.

TSMC's rival, Taiwan foundry provider United Microelectronics Corp. (UMC), this week reported its first loss in seven years amid capital spending cuts and a poor outlook.

The demand picture is also terrible for the world's second largest foundry vendor. UMC's overall fab utilisation rate for the third quarter was 79 per cent. Overall fab utilisation rate for the fourth quarter is expected to fall and hit a staggering 55 per cent. Wafer shipments are expected to fall by about 25 per cent over the previous quarter.

What other IC makers see

Other IC makers are seeing a similar picture for Q4 and beyond. Here's a sampling of results and outlooks for several chip makers:

*Actel Corp. announced net revenues of Rs.266.19 crore ($53.2 million) for the third quarter of 2008, down 8 per cent from the second quarter of 2008 and up 11 per cent from the third quarter of 2007.

Outlook: The company believes that fourth quarter 2008 revenues will be flat to 4 per cent down sequentially.

*Amkor Technology Corp. said third quarter net sales of Rs.3,602.62 crore ($720 million) were up 4 per cent sequentially from the second quarter of 2008 and up 4 per cent from the third quarter of 2007. Third quarter net income was Rs.170.12 crore ($34 million), down 48 per cent from the second quarter of 2008 and down 44 per cent from the third quarter of 2007.

Outlook: For Q4, Amkor's sales are projected to be down 15-to-20 per cent from the third quarter of 2008.

*Atmel Corp. said third quarter revenues decreased 5.0 per cent from the Rs.2,106.03 crore ($420.9 million) for the second quarter of 2008 and decreased 4.3 per cent compared to Rs.2,092.02 crore ($418.1 million) for the third quarter of 2007. Net loss for the third quarter of 2008 totalled Rs.23.52 crore ($4.7 million).

Outlook: The company currently anticipates fourth quarter 2008 revenues will be down 3 per cent to up 3 per cent from the Rs.2,001.46 crore ($400.0 million) recognised in the third quarter of 2008.

*AuthenTec Inc., the world's leading provider of fingerprint sensors and solutions, reported total revenue of Rs.92.07 crore ($18.4 million), up 22 per cent from the year-ago quarter. Net income for the third quarter of 2008 was Rs.2.75 crore ($550,000) or Rs.1.00 ($0.02) per diluted share.

Outlook: Company expects revenue in the fourth quarter to range from Rs.62.55 crore to Rs.67.55 crore ($12.5 million to $13.5 million).

*Ixys Inc., a power semiconductor company, reported net revenues of Rs.388.28 crore ($77.6 million) for the second fiscal quarter, an increase of 1.9 per cent as compared with net revenues of Rs.381.28 crore ($76.2 million) for the same period in the prior fiscal year. Net income for the quarter was Rs.30.52 crore ($6.1 million), or Rs.9.01 ($0.18) per diluted share, as compared to Rs.19.51 crore ($3.9 million), or Rs.6.00 ($0.12) per diluted share, for the same quarter in the prior fiscal year.

Outlook: Company projects revenues for the December 2008 quarter to be Rs.355.26 crore to Rs.370.27 crore ($71 million to $74 million)."

*Maxim Integrated Products Inc. reported net revenue of Rs.2,507.82 crore ($501.2 million) for its fiscal 2009 first quarter ending Sept. 27, 2008. Revenue was flat from the Rs.2,508.32 crore ($501.3 million) revenue recorded in the previous quarter.

Outlook: The revenue outlook for the current quarter is now projected to range between Rs.2,051.49 crore ($410 million) and Rs.2,201.60 crore ($440 million).

*STMicroelectronics Inc.'s net revenues for the third quarter increased 2.7 per cent sequentially.

Outlook: In Q4, ST's sequential net revenue to be in the range between flat and minus 8 per cent.

*Zoran Inc.'s revenues for the third quarter were Rs.630.96 crore ($126.1 million), compared to Rs.643.97 crore ($128.7 million) last quarter and Rs.732.53 crore ($146.4 million) for the third quarter of 2007. The Company reported a third quarter GAAP net loss of Rs.771.56 crore ($154.2 million), or Rs.150.61 ($3.0)1 per share.

Outlook: The company is currently expecting fourth quarter 2008 revenues to range between Rs.425.31 crore ($85 million) and Rs.450.33 crore ($90 million). The Company expects to record a fourth quarter loss in the range of Rs.10.01 to Rs.12.51 ($0.20 to $0.25) per share on approximately Rs.257.69 crore (51.5 million) shares.

-Mark LaPedus and Dylan McGrath
EE Times

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