Semis' Downturn - Which Companies Will Survive, Part 1

Friday morning, Gartner (IT) and IDC had sobering news for the semiconductor business. Sales for 2009 will be down anywhere from 15% to 33% from about $250 Billion in 2008, with sales exceeding 2008 levels only in 2012 or 2013. ASPs [average selling price] for all memory makers is in the trash, and for high-margin companies like Linear (LLTC), Maxim (MXIM), Analog Devices (ADI), their sales to automobile companies have evaporated. Currently, the only company making real money is Intel (INTC). In fact, if Intel had not entered the flash business [through the IMFT joint-venture], they would be making even more money.

Which brings us to the still-profitable niche players like Altera (ALTR) and Xilinx (XLNX). But, even in this niche, Lattice (LLTC), QuickLogic (QUIK), and Actel (ACTL) are just surviving.

NVDA is doing fairly well in their niche - GPU’s, and AMD should probably think about spinning off ATI to the public. In fact, the latest ATI chips are as good as or better than NVDA in processing power. Among the large memory makers, most of them are for all practical purposes, dead. In fact, they will get to lose less money - if they just shut down the FABs and stop selling chips - even if they had no change in staffing. Among the memory makers, only SanDisk (SNDK) and Silicon Storage Technology (SSTI) have a stream of licensing/royalty revenues - which will fall directly to the bottom-line, but hardly sufficient to stop the hemorrhaging of cash and other assets.

Now, why are they in such a predicament?

1. Technology improvements. The migration to smaller geometries - allows for 60 to 70% more storage per unit-area. This is fantastic for the consumers though.
2. Overbuilding of fabs. This remains the #1 scourge of all semiconductor companies. When the cycle swings to the upside, the industry usually goes on a fab-building binge - which hurts them when things go bad.
3. The hiring of engineers who are clueless about chips - especially from Asia. While I might be biased when I say this, I have seen many hundreds of “engineers” - who are clueless about what it takes to actually put a chip out in the marketplace.
4. Being too complacent about taking on debt or being forced to “invest” in FABs for guaranteed wafer-starts. Even fabless companies like SanDisk are forced to take equity stakes in FABs - making the fabless model irrelevant for larger chip-makers. In fact, any company that wants guaranteed wafer-starts purchases an equity stake in their respective FAB/FABs (examples: SNDK, BRCM).
5. While idling FABs in lean times is a good idea, it usually fails to serve its purpose [to reduce supply] since one cannot just shut off $3M a pop machines from AMAT, NVLS, LRCX. Instead, they are on a production “rotation” which might affect yields [negatively of course].
6. And finally, the most important reason for their failure is the fact that no Product Line Manager ever plans for two consecutive years of price declines of 70% annualized. In other words, no PLM [that I know of] planned that a newly introduced product, would be decimated in price in two short years. Most assume a price decline of 40% [and that is aggressive], and possibly, a migration to a more advanced technology after two years [to cut manufacturing costs].

And if this wasn’t bad enough, the Jan book to bill ratio was one of the lowest that I have ever seen - 0.48 [that means that if a company ships a dollar worth of product in Jan 2009, they have on their books, only 48 cents in orders]. This means that Gartner and IDC are wildly optimistic about the future of the semiconductor industry - at least for 2009. A 33% shrinkage of the semiconductor industry will mean a book to bill ratio of 0.67.

Despite all of this gloom, some companies are positioning themselves for success when the market bounces back. Among the contenders are:

• Applied Materials.
• Nvidia
• Silicon Storage Technologies
• SanDisk
• Lam Research
• Novellus
• Kyocera (KYO)
• Intel
• Texas Instruments (TXN)
• Linear Tech
• Maxim
• Marvell (MRVL)
• Broadcom.
• Altera
• Xilinx
• Lattice Semi
• Actel
• Micron (MU)

In Part-II, I’ll pick the five best positioned to survive this nuclear winter. In fact, I’ll pick the companies with the least debt and the highest profit margins since they alone can possibly survive and then thrive when things get better.

Go to part 2 >>>

Comments

[Silicon Inv...:]

You say, "the Jan book to bill ratio was one of the lowest that I have ever seen - 0.48 [that means that if a company ships a dollar worth of product in Jan 2009, they have on their books, only 48 cents in orders]. This means that Gartner and IDC are wildly optimistic about the future of the semiconductor industry - at least for 2009. A 33% shrinkage of the semiconductor industry will mean a book to bill ratio of 0.67."

Now, Gartner and IDC are talking about shrinkage in 2009 worldwide semiconductor sales and the Jan book to bill of 0.48 was for North American semiconductor equipment bookings and sales. So, your comment that Gartner and IDC are "widely optimistic" based on the semiconductor equipment data is completely off base and indicates either a basic lack of understanding of the industry or temporary sloppy logic.

Mar 01 09:51 AM

[Kirk Lindstrom:]

I look forward to your rating of companies but I should warn you that Gartner has been as accurate as a monkey throwing darts at major turning points.

From "Gartner Dataquest Semiconductor Capital Equipment Spending Historical Forecasts" at kirklindstrom.blogspot...

"14 February 2000 Wafer Fab Equipment and Capital Spending Forecast: How Exciting Will 2000 Be? The semiconductor recovery accelerated, and unit demand was better than expected. Spending for capacity additions began in earnest, initially in the logic-centered foundry industry, but is expected to broadly expand into memory in mid-2000.

2 October 2000 The semiconductor recovery is in full swing, driven by strong unit demand. Spending for capacity additions strongly accelerated in 2000, and positive growth is expected to continue into 2002."

or more recently near the top

"30 July 2007: Semiconductor capital equipment spending is in a shallow correction, although sales will still rise 2.7% in 2007, and growth will revive to reach 6.2% in 2008."

Mar 01 11:20 AM

[ArtfulDodger:]

We can only hope this gloomy article is wrong.

Mar 01 11:30 AM

[Nom De Plum:]

Can't wait to see your Part II "The Survivors"...I need a few good shorts.

Mar 01 04:02 PM

[Robert Cast...:]

I pointed out in a Seeking Alpha article that there is no longer a correlation between semiconductor growth and equipment spending. seekingalpha.com/artic...
Since 2001, semiconductor equipment have been smarter in increasing the number of chips made without a corresponding increase in equipment spending. The major reason is the movement to 300mm wafers, responsible of a 2.25x increase in chips made for the same number of 200mm wafers.

There is a loose correlation between GDP and semiconductor production. The greater the growth in the economy, the greater the spending on technology. Our analysis at The Information Network (theinformationnet.com) suggests that with a worldwide GDP growth rate of 0.5 (International Money Fund's January 28 2009 forecast), the corresponding decrease in semiconductor sales will be minus 32%. Look for a more complete picture in about a week in Seeking Alpha.

Kirk, I love your comment about Gartner (by the way I read your comments regularly in Silicon Investor. I have been competing with Gartner since I started The Information Network in 1985. I couldn't agree with your blog more. Problem is Gartner has this quadrant system where they promote companies. As these companies want to get on Gartner's good side and be in the right quadrant, they continue to spend money on their market analysis, even though it may be wrong.

Mar 01 08:30 PM

[donzelion:]

I concur: semis could see a major shakeout, with many of the weaker, lower-margin players dropping by the wayside, while a few stronger players set themselves up. I like Intel (and if I'm wrong, they at least give me a pretty serious dividend).

Mar 02 11:25 AM