Texas Instruments (TXN) and Altera (ALTR) issued quarterly results and held analyst conferences yesterday. Both have reason to believe that general demand for semiconductor chips hit bottom in Q1 2007 and is rising Q2. Are they right?
You can see my full summaries of the conferences from these links: TXN; ALTR.
Texas Instruments (TXN) is the bigger player, with Q1 revenues of $3.2 billion, down 8% sequentially and down 4% from Q1 2006. They believe Q2 revenues will be $3.32 to $3.60 billion, which would be up 3 to 12%. Their main reason for the belief is that daily sales were up 20% in March and April compared to February. It takes time for a sale to be shipped and booked as revenue, but some of that 20% increase should start appearing in Q2.
Altera (ALTR) is more of a niche player, specializing in programmable logic devices like FPGAs and CPLDs. Their Q1 revenue was $305 million, down 4% from Q4 2006 but up 4% from Q1 2006. The guided revenues to 1% to 4% sequential growth for Q2. They were more cautious about the future, saying they are seeing a slow rebound, but some end markets are still weak.
Both companies and many other chip makers argued that the downturn that started roughly in Q3 2006 was more a result of inventory management changes than long-term demand weakness. It seems that in 2006 many finished goods makers decided to move to just-in-time acquisition of parts. In the transition to that they used up their own inventories and paused their buying. They only started ordering specific parts when they were ready to use them. This caused a slump in demand at the manufacturing end. Yet the chip makers could not cut their own inventories because the end users still wanted rapid shipments after orders were made. Another factor was macroeconomic fear for 2007. So far those fears have been wrong. Consumer demand has been steady in the U.S. and markets like China, India and Germany have been booming.
Nothing is certain in the world of economics, but there is a consistent story here: in order to meet demand late in 2007, end-product makers are going to need to seriously bump up their chip orders. They can no longer just reach into their own inventories, which are too lean to allow that.
Some end markets may be stronger than others. Texas Instruments complained (following Motorolla, which it supplies chips to) that the cell phone market has been increasingly difficult to make a profit in. Their solution is to continue to integrate more functionality on each chip to cut costs and restore the profit equation.
Altera is in a better position in some ways than TI. Their products are more specialized. But in Q1 that had a 35% sequential decrease in their Hardcopy chips for computer storage systems. They believe that is a one-quarter event, but added that since these chips are custom manufactured, it takes some time to go from an order to shipping and getting paid.
I have to wonder how wise it is to fight it out in the cell phone market. It is true that it is a huge market and 3G is just coming into play. But it seems that a lot of chip makers have their eyes on the same pie.