Thursday, February 8, 2007

Semiconductor Inventories and Demand

I am fascinated by technology, by the businesses that create, manufacture, and sell it, and by the human factors in management. Listening to executives from Atmel, Linear Technology Corporation, Microchip, Maxim, Texas Instruments and Xilinx at their analyst conferences explaining Q4 results, all these factors converge. Q4 2006 was not the best quarter for the semiconductor industry. While most companies had year-to-year improved revenues, most were sequentially down from Q3. Many predicted further deterioration in revenues for Q1 2007. The down trend was widely attributed not to decreased demand, but to reductions of inventories at customers. To some extent seasonality is involved, as when end-products are aimed at consumer holiday buying and had to be produced in Q3 in order to be incorporated into products and shipped back across the Pacific to sell to spendthrift Americans.

So what investors want to know is whether this is the beginning of a downward trend, or just a temporary adjustment of inventories. It is also important to consider how companies are competing and may buck any trend.

Atmel (ATML) was down 5% sequentially and up only 2% year-over-year. They have never really recovered from the 2001 bust, so don't indicate any kind of trend.

Linear Technology Corporation (LLTC) did worse, down 8% sequentially but up 1% from the year-earlier quarter. They expect revenues to fall another 4% to 7% in this March quarter.

Microchip (MCHP) was down 6.3% sequentially, but up 6.9% year-over-year. They are optimistic that Q1 2007 will be the bottom of the cycle and are predicting that revenues will be flat sequentially. [I own MCHP stock]

Maxim (MXIM) escaped relatively unscathed, with revenues down only 1% sequentially but up 11% from Q4 2005. However, they are predicting that Q1 2006 revenues will be down 3% to 6%.

Texas Instruments (TXN) revenue was down 8% sequentially but up 4% from year-earlier.

Xilinx (XLNX) revenue was down 3.5% sequentially, but flat from the year earlier. They guided to flat to down 5% sequentially for Q1.

I think there was some tightening of end-user inventory because of uncertainty over the 2007 economy. Since the 2007 economy looks rosy at the moment, I think that when demand holds up the end users (electronics device makers) will have to start rebuilding inventories. But remember that each company produces chips in multiple categories. Slack or robust cell-phone demand will not impact all companies equally. Defense spending or cutbacks hurt some companies more than others.

When we get Q1 2006 results I'll be looking back to see which executives gave good guidance. Of course unfounded optimism is now suspect: it seems like an attempt to manipulate share prices upward.

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