AMD, what to look for

Another post published at Seeking Alpha:

3 More Reasons to Stay Long AMD

This would not be the best article for someone who knows nothing about Advanced Micro Devices. But so much has been written about AMD. There have been rumors of an inventory issue (too much of it) with high-end GPU cards. That is supposed to be the result of the end of the Bitcoin mania. So now gamers can actually buy high-end AMD GPU cards at reasonable prices. If there is some excess inventory, it will work out of the system quickly. The only real problem would be if people just plain stop buying high-end graphics cards, which does not seem likely.

There is the PC unit decline (or not) issue, and the ancient market share, AMD vs. Intel issue.

And we are all waiting to see if there will really be a AMD chip in some new mass market device beyond PCs and gaming consoles.

Which will all come out when AMD reports Q2 results on July 17. As usual, I will read and listen to the presentation and put up my notes (at AMD analyst conference summaries). But if you are thinking of investing in AMD, you should listen yourself (the link will be at AMD calendar). Why give the professionals an edge?

Good luck. Keep in mind I am always looking for the long-run value; I don't try to predict stock prices in the short run.

I own AMD stock; I am a business writer, not an investment advisor.

Microchip (MCHP) Inventory Correction End May Be Near

There is no way to describe Q3 2011 as a good quarter for Microchip (MCHP). The maker of microcontroller and analog chips reported revenues of $340.6 million, down 9% sequentially from $374.5 million in Q2 and down 11% from $382.3 million in the year-earlier quarter.

GAAP net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier. GAAP EPS were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.

Given that and the general stock-market and macroeconomic malaise, the main thing propping up Microchip's stock price (closing today at $33.07) is the dividend, now running at $1.392 per share per year, or 4.3% at today's price.

As to the outlook, Q4 guidance was week, with revenue in the range of flat to down 7% from Q3.

I don't think that Microchip is failing to compete in its market segments. It continues to be the world's leading microcontroller provider. Economic uncertainty caused weakend demand, which in turn caused OEMs to tighten up their inventories.

Then again, the picture could be brighter for Q1 2012. The first quarter is typically seasonally slow for semiconductor chip makers, but within that seasonality Microchip's management, as early as the analyst call on November 3, foresaw an uptick, predicting that "shipment rates in December will be below the consumption rates of our customers."

Here it is important for analysts to note that, unlike most chip manufacturers, Microchip does not recognize revenue when it makes shipments to distributors. Because of the nature of Microchip's business (selling a large number of parts to a large number of OEMs), a lot of sales are through distributors. Microchips recognizes the revenue when the distributors have shipped the chips to end customers.

This means that Microchip tends to see results (reported revenue) of general semiconductor trends, both up and down, a quarter earlier than its peers. While there can be differences in results because of focus and competition for market share, a Microchip revenue downturn is a fair predictor of a sector downturn one quarter later, and the same for upturns.

If this December shapes up to be a good one for electronics sales in the U.S., and if Europe holds together, January may look very different than most investors would have expected until recently. If end sales cause inventory shortages at OEMs, the pace chip sales in Q1 could be strong, compared to the usual range from seasonality.

So keep an eye on Microchip's Q4 results and Q1 2011 results. In the meantime, if you are holding MCHP, enjoy the dividends.

Keep in mind that the semiconductor industry, including its microcontroller and analog segments, is very competitive.

Disclaimer: I am long MCHP and have no plans to change my position this year.

See also:

www.microchip.com

Will Thailand Floods Hit Marvell Technology?

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives (HDDs), cell phones, networking and other devices. Marvell's first product was a chip to control hard drives, and in its first decade it came to dominate that market. This year revenue from chips for hard drives has represented about half of total Marvell revenue.

This week massive flooding in Thailand caused Western Digital manufacturing facilities to be shut down there. Obviously this could hurt demand for Marvell's HDD controller chips, at least temporarily. How much trouble could this be for Marvell's Q3 and Q4 results? (its fiscal Q3 ends October 30th; Q4 ends January 31st)

Western Digital is currently Marvell's largest HDD customer. Earlier this year Western Digital acquired Hitachi's HDD division. Marvell is generally granted to have the best HDD controller chips, so it has been expected to expand its already substantial market share by increasingly supplying chips for Hitachi. It has also been becoming a more important supplier for another big HDD manufacturer, Seagate, which is acquiring Samsung's HDD division. In Q1 2011 Western Digital led global shipment in units, but Seagate led in revenues.

According to Western Digital, two of its Thailand facilities were shut because of flooding. In addition there has been flood damage to the supply chain for the plants. It expects a "significant impact" on its ability to meet demand in the December quarter.

Seagate's Thai factories were not directly affected, but it also expects supply chain problems of unknown magnitude.

While all this is sorted out Marvell will probably lose some October shipments, which may impact Q3 revenue, depending on revenue recognition timing. It is too early to predict how long beyond October the effect could last. In the longer run it is likely just a bump in the road. There is inventory at every stage of the chain. HDD sales have not been robust this year, so the inventory situation is probably not bad. PC manufacturers have inventory on hand, and there have been no reports that the flooding ruined any drives already made or in production. To some extent supplies and production could be shifted to other plants, which should have excess capacity, if not now (gearing up for holiday PC sales), certainly in December and January.

The situation is worth watching. If it takes months instead of weeks to get back to full production there could be a substantial impact on Marvell's Q4 results. On the other hand Marvell has been trending to be less reliant on HDD chip sales for its profits. Revenues from its Chinese smartphone chips, which should be ramping in Q3, are probably the best indicator of how well Marvell will fare in 2012.

Disclosure: I am long Marvell Technology (MRVL).

See also: http://www.marvell.com/
My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Keep diversified!

Inventory Corrections and Short Memories

My wife's business actually sells widgets. It is a micro-business, not even receiving her full time attention. She has no employees. And she just might be seeing, on a micro scale, the turn around of the American and global economies.

She makes jewelry. Most of what she sells she designed and is made specially for her by foundries. She packages the pieces and sells them wholesale to non-profit groups that use them either as fundraisers or for reward gifts. A good number of retail stores also buy from her. Almost everything she sells wholesales for $4 each. See her jewelry site.

When the faux-Depression panic hit last fall she noticed many of her customers ordered less than they had in the past, or not at all. Worried that she might get stuck with a bunch of inventory, she curtailed orders to her suppliers. We discussed it. I voted for keeping a good inventory because it is a microbusiness; the inventory value is pretty small, so the real risk is not having enough to keep customers happy when they do order. Her vote, the one that counts, was to do minimal reorders. Only reorder when actually out of an item. This can be a problem because is can take 6 weeks to get the foundry to fill an order for more parts.

Here we are in April, and she is complaining that all her money is going to be used to restock her inventory. She has almost lost large orders because of not having enough items in stock.

So now the foundries - she uses an American pewter specialist and an American glass blower - have orders from her. These are small businesses too, so even at her scale, that has an impact. They seem pleased to get the orders.

The economic statistics keepers tell us that business inventories have declined a lot since 2007. The question seeing these aggragate statistics does not answer is: are inventories low or high? Of course some businesses did not cut inventories enough, and may still be still cutting. Others must be finding themselves in the same position as my wife: they were too careful, too cautious. They need to restock.

With unemployment still growing, we can't be sure that we won't need another round of inventory cuts. But there are scattered reports that some of the companies that laid off people early are understaffed. For a while that will mean overtime expenses, but eventually it makes more sense to start hiring again.

I went to the birthday party of a retail store in Gualala (California) last Saturday. It was having a 40% off sale, that day only. The stuff there is what I call luxury items, optional items. Thrifty people don't shop there. I expected a gloomy party where people ate free food and drank free champaign and nothing much sold. Instead there was a line of women snaking through the store. They were clutching items they had been desiring for months. The platters of cheese and cupcakes were almost ignored. The demand is there; people who have not lost their jobs are looking for an excuse to spend.

More than 8% of the workers in America may be unemployed, but senior citizens are mostly just fine. Most followed the advice of conservative financial planners and got out of risky investments as they aged. Their CD's may not pay high interest rates these days, but the money is there to be spent if they want to.

I think American consumers have shown more restraint than they are capable of in the long run. I am all for thrift and restraint. I think you should avoid buying things on credit. But there are still plenty of American families with strong balance sheets, and there are more of them after a year of restraint.

I think we are going to see good consumer demand from March, and growing demand in April and May, taking the unemployment rate into consideration. Retail stores will be among the first to rehire, and in many areas new housing construction looks like it is on the agenda.

We could have avoided this down cycle by being less exuberant in the up cycle, but that is not the American way. We party hard and we crash hard. We are happy to leave it to the Fed and Congress to try to balance things out.

We have short memories. We forgot the tech bubble and jumped into the housing bubble. We'll forget this economic lesson in a few years as well.

Buy low, sell high. It is great for the professional investor, but we know what the masses will do. They sold when they were scared, when the market was low. Then they won't buy back in until they feel they are missing the new party.

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.