Philips chip CEO reiterates Q2 sales forecast

Lucas van Grinsven

AMSTERDAM: Philips Electronics on Thursday reiterated its second-quarter

forecast of mid-single-digit sales growth at its semiconductor unit, while

expressing ambitious growth targets for the next few years.

"Our guidance is mid-single-digit sales growth (compared with the first

quarter) and we stick to that," Scott McGregor, chief executive of Philips

Semiconductors told Reuters in an interview. His comments come just a few days

after profit and revenue warnings from chip makers Intel and RF Micro Devices

because demand for computers and mobile phones is not picking up as expected.

But some analysts noted that his second-quarter sales target was markedly

lower than the 10 per cent growth forecast from Franco-Italian arch rival

STMicroelectronics and the double-digit figures of rival chip-making units of

US-based Texas Instruments and Germany's Infineon.

"It's not very bullish," said J P Morgan semiconductor analyst Uche

Orji in London. Philips shares closed down 2.4 per cent at 28.31 euros on

Thursday, after falling by as much as 3.2 per cent, underperforming both the

FTSE European semiconductor index as well as the Dow Jones Eurotech index.

The chip industry has been through one of the worst downturns in its

existence. Last year sales fell 30 to 40 per cent, dragging most of the

capital-intensive semiconductor makers into the red because of their high fixed

costs.

Long-term ambition



The unit of Netherlands-based Philips is Europe's third-largest chip maker
and number 10 worldwide. "We think it's possible to take a top five

position," McGregor said when asked where he wants his company to rank in

the world market in three to four years.

His comments were welcomed by analysts who observe that Philips has been

hovering around the number 10 position in chips for a decade and a half, while

the company has focussed on the fast-growing areas of consumer electronics and

communications.

"It's good to hear that Philips is ambitious. They haven't been gaining

market share in 10-15 years, while others like STMicroelectronics has whizzed

past," said Steven Vrolijk, an analyst at ING Barings in Amsterdam.

Philips, which is often regarded by investors as a semiconductor stock but

also sells consumer electronics, lighting, electronic components and medical

equipment, said utilisation rates of its chip factories were rising above the 50

per cent level of the first quarter, but McGregror declined to say by how much.

The semiconductor unit is expected to break even if utilisation rates are

above 60 per cent. It made a 103 million euro operating loss in the first

quarter on sales which rose seven per cent from the fourth quarter to 1.01

billion euros. McGregor said he could not forecast sales beyond the next three

months because his order books did not reach any further.

He identified a number of growth engines that would help the company increase

revenues and gain market share. McGregor singled out chips for DVD recorders,

digital televisions, wireless local area networks (WLAN), displays and

smartcards as areas.

He said Philips was either first to market (DVD recorders) or offered unique

expertise (displays, smartcards), better integration skills (WLAN) or the

advantage of market leadership and support from other Philips divisions (TVs).

Medium-term



But he also emphasized that some areas were medium-term opportunities that
would take several years to grow to significant sales, such as DVD recorder

chips.

"The DVD (recorder) market still has to grow, but the silicon (chip)

content in such a product generates many times more revenues than the chips in

DVD players," he said. Leading makers of chips for DVD players, ST and LSI

Logic, face heavy price pressure in that market, he added.

The semiconductor industry relies for more than half of its sales on the

sluggish computer and cellphone markets, but McGregor said Philips could outgrow

the market by integrating new chip functionality, such as FM radio chips which

he sees becoming a standard feature on handsets. Mobile phone market leader

Nokia from Finland, a Philips customer, has included an FM radio in its 8310

handset.

In the area of set-top boxes for TVs, in which ST is the largest chip

provider, Philips Semiconductors hopes set-top box functions will be integrated

into digital TV sets, a market in which Philips is the leader with 35 per cent

market share.

"That's a great opportunity for us," he said.

On the cost side, Philips' recent cooperation with rival chip makers ST,

Taiwan Semiconductor Manufacturing Co. (TSMC) and Motorola on manufacturing

processes will create the opportunity to outsource a larger part of its

production to TSMC, the world's largest contract chip maker.

Philips, currently struggling with overcapacity due to the downturn,

outsources between 10 and 20 per cent of its chip production. A common

production platform would give Philips the opportunity to increase that

percentage significantly, reducing its risks of getting hurt by overcapacity

again, he said.