IC sector recovers, but vendors remain cautious

TechOnline India - September 10, 2009

Is the IC downturn over?

SAN JOSE, Calif. -- Is the IC downturn over?

The industry is not completely out of the woods, but there are ongoing signs of a recovery. This week alone, for example, Altera, Microchip, RF Micro, Skyworks, TI, Volterra have separately raised their quarterly forecasts.

Others are also seeing better forecasts, but most analysts believe the overall semiconductor sector will contract this year. On the other hand, "we're clearly on the road to recovery,'' said Doug Freedman, an analyst for Broadpoint AmTech. ''OEMs and electronics companies are on a path of recovery.''

Now, the bad news: Freedman warned that expectations could be too high and the industry ''overshoots the recovery'' for semiconductors. ''Despite positive earnings pre-announcements, the overall tone from companies remains relatively muted and cautious,'' he added. ''There is less enthusiasm than one may expect, likely due to limited visibility on the sustainability of current business levels.''

There are other mixed signals. ''Inventories remain lean throughout the channel, with few signs of double-orders. Visibility and lead-times are improving slightly, though continue to be more limited than normal,'' he said. ''Pricing has remained stable throughout the downturn, and we forecast ASP pressure to remain low as demand returns given the lack of fundamental/structural cost reduction actions. We think there will be limited reports of ASP aggression in an attempt to enhance recovery growth with share gains.''

Still, on a market-by-market basis, there is good news--even on the memory front. ''The DRAM market is tight. NAND prices have been stable,'' said Dinesh Moorjani, an analyst at Broadpoint.AmTech.

''September DRAM contract pricing should be up mid-single digits,'' added Daniel Amir, an analyst at Lazard Capital Markets. ''Inventory days remain low throughout the industry, as PC OEMs continue to draw down supply. We don't believe that supply will increase beyond demand during the 2H, as many of the weaker players continue to be involved with capital-raising activities and won't be able to implement process migrations in the near term.''

And as previously reported, there are shortages of DDR3 SDRAMs in the market. ''There is a continued trend toward DDR3 in the high-end notebooks. DDR3 still commands a 20 percent premium to DDR2, as most of the Taiwanese DRAM makers are unable to manufacture DDR3,'' he said. ''In addition, the industry is waiting for the launch of Win 7 and the potential impact it will have on the DRAM market. At present we believe that it will have a small impact for 2009.''

On the NAND flash side, the outlook is mixed. ''We expect NAND pricing to remain stable at the current prices. As various players ramp 3xnm production, the supply increase is likely to offset the seasonal increase in demand in September,'' he added.

On the analog side, there is also decent news after a downturn in the sector. On Wednesday, for example, Texas Instruments Inc. (TI) raised its Q3 revenue and EPS guidance.

TI's ''management's commentary suggests that the demand picture is meaningfully improving across end markets and geographies (including improvements in Europe and in industrial and automotive shipments) and that supply conditions are also very favorable for chip suppliers on a go-forward basis,'' said Craig Berger, an analyst with FBR.

''Importantly, management said distribution inventory dollars are largely holding steady in 3Q, while distribution days of inventory fall 'dramatically,' '' Berger said. ''TI management further said that lead times are stretching out for some products and that chip prices are increasing for some commodity products. These dynamics suggest some future chip replenishment is likely at distribution and potentially at some OEMs, in our view.''

TI's disclosure bodes well for its rivals. ''We believe TI's commentary is specifically positive for National Semi, which reports today after market close, heavy exposure to analog, wireless, and distribution sell-in; Fairchild Semi, heavy distribution and sell-in exposure; International Rectifier, high automotive exposure and distribution sell-in; On Semi, high automotive and European exposure; Linear Technology, high industrial and automotive exposure; and Maxim Semiconductor, among others,'' he added.

{pagebreak}Earlier this week, Altera, Microchip, TI and others raised their forecasts. Another wireless vendor, RF Micro Devices Inc., said that demand for its products is tracking ahead of plan.

Skyworks Solutions Inc. increased its financial outlook for the fourth quarter of fiscal 2009 given broad-based improvements in order demand. For the period, Skyworks now expects revenue in the range of $220 to $225 million and non-GAAP diluted earnings per share of $0.21 to $0.22.

"Multiple new program ramps coupled with strong operational execution are contributing to better than planned top and bottom line growth," said David J. Aldrich, president and chief executive of Skyworks, in a statement. "Our diversification into a broader set of analog semiconductor sectors, share consolidation in our core markets and our scale advantages are increasingly enabling us to outperform our addressable markets."

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