Tech Glut, Demand Falloff Could Start to Ease Later This Year
For much of the past two years, Orange County-based technology companies had a dreamy future: high revenue growth, rising profits and skyrocketing stock prices.
But come 2001, and chipmakers and other tech companies here hit a rude awakening. Most technology companies now are saddled with too much inventory, reduced demand for their products and sinking stock prices on Wall Street.
The predicament is putting some companies on the brink.
To survive, most are slashing jobs, cutting other costs and selling some businesses in the hopes of seeing themselves through to a market rebound.
Chip sales have been on a decline for the past eight months now.
In April, global semiconductor sales hit $13.7 billion, down 10% from a year ago and off 4.7% from March.
“Things are pretty slow” industry-wide, said David Sonksen, chief financial officer at Irvine-based Microsemi Corp., Orange County’s third-largest chipmaker behind Newport Beach-based Conexant Systems Inc. and Broadcom Corp., which is based in Irvine.
On the Sidelines
Newport Beach-based Knightsbridge Asset Management LLC has been following the semiconductor industry for the past year, but the firm has stayed on the sidelines as far as investments in the sector.
“April was the worst decline in 17 years and May is looking as bad as April,” said John Prichard, partner and portfolio manager at Knightsbridge.
The pressing question for chipmakers, other tech companies and investors is whether we’re at the bottom or is the worst still yet to come?
The industry’s big names, from Intel Corp. to Ingram Micro Inc., offer mixed views on what lies ahead.
On the one hand, Intel and other chipmakers are betting on a resurgence in the fourth quarter.
Eyeing Q4, With Caution
But Ingram Micro and others say the U.S. slowdown is spreading to global markets.
“In the short term, there are not a lot of reasons for a quick turnaround in the industry,” said Lisa Briggs, spokeswoman for Conexant.
Conexant is among the many companies that have had difficulty gauging the future trend in the semiconductors.
Analysts expect the leading maker of chips for analog modems to have a 50% drop in revenue this year.
Still, most local executives and observers are cautiously betting the sector’s excessive inventory and deferred sales could fade by the fourth quarter or early next year.
“Although current demand conditions continue to be soft, we are starting to see some signs of stabilization in the business for the second half of the year,” said Henry Nicholas, Broadcom’s chief executive and co-founder.
Nicholas’ comments came in a June 6 warning that Broadcom’s second-quarter sales would be off as much as 35% from the first quarter.
For sure, the computer and chip sectors are cyclical. But in the past, downturns occurred largely because of overcapacity.
For the first time in decades, the downturn and inventory glut are because of falling demand.
“The downturn is not due to overcapacity,most of the capacity has yet to come online,” said Rich Wawrzyniak, an analyst with Phoenix-based Semico Research Corp.
For chipmakers and other technology companies, the result is a double-whammy, according to Knightsbridge’s Prichard.
“First the sales volume comes down,” he said. “What follows after that is price.”
Still, industry observers say they do see a light at the end of the tunnel.
And not everybody is suffering to the same degree. Microsemi, for one, said it hasn’t seen much of a slump in demand.
“Because of our diversity, we are not being impacted,” the company’s Sonksen said.
Microsemi makes chips for the aerospace sector, healthcare equipment and handheld computers.
The company’s stock is a relative standout among chipmakers.
By the same token, though, Microsemi didn’t see the heady gains Broadcom and Conexant did in their heyday.
The San Jose-based Semiconductor Industry Association expects an industry-wide recovery in the second half of this year that will turn into growth of 20.5% in 2002 and 25% in 2003.
“The industry has a 17% compound annual growth rate for the past 40 years and we expect that to continue for the foreseeable future, despite periodic cycles,” said Kirk Pond, chief executive of South Portland, Maine-based Fairchild Semiconductor International Inc., in the trade group’s semiannual forecast.
Conexant’s Briggs said that while there isn’t much hope in the industry for a revival this quarter, the company is optimistic in the long run.
She points to the wireless sector as a prospect for future growth.
“By the end of 2002, companies should resort to their historical business models,” Knightsbridge’s Prichard said.
Conexant, for one, is seen by analysts posting 20% revenue growth in 2002.
Wawrzyniak of Semico also sees better times a year from now.
“We expect a decline of 12% in revenue this year,” he said, “but a recovery next year.”
Wawrzyniak said that the chip industry could start its recovery as early as the third or the fourth quarter.
But the initial growth in sales isn’t likely to be sufficient to offset the slump in chip sales in first and second quarter.
“Assuming that people still want to buy MP3 players, the demand will snap back later this year and pick up next year,” he said. n
