SEMI REBOUND
Chipmakers Are Awakening From One of Their Worst Downturns, But Gains Are Spotty
Last year, Orange County’s beleaguered chipmakers wondered when the semiconductor industry would hit the floor. Now, with sales slowly picking up, they’re wondering if a nascent rebound will stick.
Newport Beach-based Conexant Systems Inc., which has two quarters of sequential sales growth under its belt, projects revenue for the current quarter to come in about 5% higher than the recently concluded one.
Irvine’s Broadcom Corp. also saw sales pick up by 5% in the first quarter,its third-straight sequential quarterly gain. Broadcom officials see sales in the current quarter gaining steam on the first, though they aren’t saying by how much.
While a far cry from the heady growth of two years ago, the results have instilled a decidedly more positive tone among the top brass at local chipmakers.
“I think early on we’re going to be cautious,” said Dwight Decker, Conexant’s chief executive, in a recent interview. “But things are looking good right now.”
The chip sector is known for its ups and downs. But many might swear that this recent downturn has been the harshest in recent memory.
As sales of computers, networking and wireless gear plunged in the past two years, chip companies felt the fallout. They tallied up massive losses and laid off thousands of workers. They also cut prices,and forsaked profits,to move chips out the door.
Analysts and industry officials predict the chip sector is at bottom and is ready to grow again. But the signals still are mixed.
Initial signs of a rebound haven’t been all that impressive. Global chip sales flattened out at the end of 2001 and have climbed only a paltry 7% so far this year, according to the San Jose-based Semiconductor Industry Association.
But considering 2001 sales dipped by nearly a third from 2000, even a small increase is notable.
“Flat to slow growth of semiconductor sales in the first quarter of this year is in line with expectations,” said George Scalise, the trade group’s president. “Our forecast calls for the second quarter to be slightly stronger with accelerating growth in the second half of 2002.”
Conexant’s Decker, who serves on the association’s board, said he sees Asia driving the industry’s growth this year (see related story, page 26).
“Our expectation is that the recovery will gain momentum in the second half of the year and continue with strong growth through 2003 and 2004,” he said during the trade group’s recent midyear forecast in Redwood City.
For the year, global chip sales are pegged to rise 3.1% to $143 billion, with Asia being the largest market, followed by the U.S. and Europe. With a projected 27% growth rate this year, Asia is set to account for all of the industry’s growth, according to Decker.
In 2003, the association said it sees industry growth of 23.2% to $177 billion, followed by a 20.9% gain to $213 billion in 2004. In 2005, growth in chip sales is seen dropping by about 1% to $215 billion.
But the industry’s recovery may be spotty.
On June 6, industry bellwether Intel Corp. threw a damper on the industry’s comeback by revising downward its sales outlook for the current quarter.
Demand from corporate customers just has not picked up, the company said, casting doubt on the strength of a second-half rebound.
Only portions of the chip sector are set to grow this year, industry research suggests.
Sales of microprocessors that go inside personal computers,Intel’s bailiwick,are seen growing just 3.9%, according to market tracker International Data Corp.
Sales of chips that go inside wireless phones, on the other hand, are seen growing by 18% this year, according to IDC.
Fortunately for OC companies, the chips are in their favor.
Take wireless. In Conexant’s December quarter,the first time in a year the company saw sales grow,wireless chip sales jumped 42%. While wireless sales growth slowed to about 3% in the March quarter, they have been a bright spot for Conexant. By month’s end, Conexant plans to combine its wireless business with Woburn, Mass.-based Alpha Industries Inc. to form Skyworks Solutions Inc.
In May, Broadcom acquired Santa Clara-based MobileLink Telecom Inc., which makes chips for wireless handsets.
And Irvine-based Intersil Corp.’s recent buy of Milpitas, Calif.-based Elantec Semi-conductor Inc. gives the company a $200 million yearly wireless business.
“Intersil can now use its analog and wireless industry expertise to emerge as a dominant mixed-signal vendor to the wireless end markets,” Robertson Stephens analyst Arun Veerapppan said in a report.
Other sectors are warming, too.
In the March quarter, Mindspeed Tech-nologies, the networking chip division of Conexant, saw sales grow 34%. The unit was the hardest hit of Conexant’s businesses last year as customers such as Cisco Systems Inc. cut back chip buying amid near-decimated sales of routers and other networking gear.
Conexant sees Mindspeed growing at least 10% in the current quarter.
Broadcom also is seeing a networking rebound,it was a main driver behind the company’s $238 million in first-quarter sales.
“We’re seeing a recovery and the complete elimination of inventory in the channel,” Broadcom Chief Executive Henry Nicholas said in an earlier interview. “We’re even seeing some signs of renewed growth in cable.”
Analog and mixed-signal chips, which sit inside everyday items such as wireless phones and battery chargers, have long been considered a stable business.
That’s good for Irvine’s Microsemi Corp., a maker of mixed-signal chips. While the company’s sales in the March quarter fell 8% from a year ago and slightly from the prior quarter, its outlook is rosier.
“Business outlook for the third (June) quarter is improved over the second quarter,” the company said in a statement. “Although the anticipated improvement in military orders has been slower to develop than anticipated, military order rates are expected to accelerate in the next two quarters.”
But the upshot is that a chip recovery won’t be a quick one.
“The semiconductor industry should close out 2002 with modest but sustained overall growth,” the Semiconductor Industry Association’s Scalise said.
Wall Street is mixed on the sector.
The Philadelphia Semiconductor Index, a group of 17 chipmakers, was up nearly 30% at recent check from its 12-month low.
But some traders aren’t convinced of further gains. Sales of options contracts in which investors are betting the index won’t hit 500 this month have been brisk.
