Wireless Chip Inventory Glut Spreads Beyond National Semi to Xilinx and Broadcom

We reported earlier on National Semiconductor’s (NSM) earnings miss, which was largely driven by the inventory glut we have been warning about. On its conference call, management sent a mixed message on how they are dealing with it.

Now speaking of inventories, during Q2 we did also bring down our own in-house inventories by about $18 million, and we did this by lowering our fab utilization to slightly below 60% for the quarter. And although our gross margin also dipped down to about 59% in Q2, which includes by the way, $6.6 million of stock compensation expense, it is worth noting that this gross margin performance is nearly nine points better than it was the last time our fab utilization dropped 63% back in the fall quarter of calendar 2004.

In Q3, we will continue to run our fabs below 60% utilization in light of the near-term demand environment. We are planning to reduce on-hand inventories again, but not as much as the $18 million reduction that we did in Q2.

Running below capacity will at least mean the inventory does not continue to build right now. But unless end demand picks up, they will have to run below capacity for some time before they reach desirable utilization levels. The thing is, though, they continue to add more capacity.

In Q2, capital expenditures were about $30 million. We are projecting Q3 capital spending to range from $40 million to $45 million, and one of the key projects we are continuing to work on, is converting some of our capacity into Texas fab from 6-inch wafer equipment to 8-inch wafer capacity.

With the company is running below 60% capacity utilization, there is hardly a hurry to convert to larger wafers. If anything they should be delaying the capex until… well… they need capacity. Given what has happened during the normally-strong Q3 holiday lead-up, we’re guessing that will be a while.

NSM 1-yr chart:

And hot on the heels of the National Semiconductor disappointment, Xilinx (XLNX) cut its own earnings forecast.
Yahoo! Finance reports:

Xilinx, Inc. [yesterday] announced its business update for the December quarter of fiscal 2007.* The Company now expects December quarter sales to be down 2% to 5% sequentially due to weaker than anticipated turns business in the month of November, particularly from communications customers. This is a revision from previous sales guidance of up 2% to 5% sequentially.

Gross margin guidance is expected to be unchanged at 61% to 62%, including approximately $2 million of stock-based compensation charges.

XLNX 1-yr chart:

Who’s next?

Well, given the sales weakness in the wireless semiconductor chain mentioned above, you might wonder whether inventory is also piling up at Broadcom (BRCM). Reuters reports Broadcom says Q4 inventories almost “ideal.”

Wireless chip company Broadcom Corp. expects to finish its fourth quarter with inventories near an ideal level, Chief Executive Scott McGregor said on Thursday.”We still believe we’re on track for Q4, to close out Q4 with inventories approximating an ideal level for us. So we’re very comfortable with that,” McGregor told an investment conference.

Notice he didn’t say anything about Q1. The market shared our skepticism, sending the stock down 2.5% yesterday and another 1.5% after hours in the wake of the National Semiconductor and Xilinx warnings.

BRCM 1-yr chart:

Comments

[Anu Menon:]

i guess at the end of the day everyone knows there's inventory out there.. the question really is, which stocks will go up/down.. any ideas??

2006 Dec 08 02:47 PM

[William Trent:]

I guess they do now. We've felt like we were just generating a breeze for the last six months talking about it, though. As far as stock ideas, for what they are worth our current holdings and a watch list are listed at stockmarketbeat.com.

2006 Dec 08 04:45 PM