Technology bottom may be at hand

Bob Zimmerman

One of the longstanding indicators that technology is at or near bottom has

been the book-to-bill ratio for semiconductors. This is simply a measure of the

monthly flow of new orders for chips compared to what just shipped and is now

being billed. A 1.0 ratio indicates sales equals manufacturing and foretells a

slowdown in end-product market acceptance, unless the previous book-to-bill was

lower. At the low point in this cycle, book-to-bill hovered in the 0.9 range,

indicating replacement orders were not arriving, systems houses were not

building and shipping new products, and the economy was stalled. At the peak of

the previous cycle, integrated circuit (IC) orders book-to-bill ratio peaked

well over 1.5, orders were rationed, and system houses placed the same orders

with multiple vendors merely to get any components.

SEMI, the trade journal of the semiconductor industry, reported a May

book-to-bill ratio of 1.26 vs. April’s revised figure of 1.22; this appears to

exceed expectations slightly. This indicates systems houses anticipate a strong

2003, with the turnaround starting in the fourth quarter of 2002. Even though

the growth is minimal, IC houses are now faced with an investment decision: Is

the current book-to-bill an aberration, or does it signal the bottom with an

order spurt to come? Intel and AMD both indicated they were hit by the decline

in PC sales, and AMD usually has a slow start in the third quarter. However,

Teledyne has reported stronger than-expected semiconductor test bookings,

and National Semiconductor reported 13.5 percent quarterover-quarter

revenue growth, with booking activity and outlook adding support to a view the

bottom is near. Despite this activity, the issue is whether the end markets will

materialize; on this note, worries will persist for at least the next quarter. A

GigaWorld IT Forum attendee survey conducted by SoundView Technology Group

indicated systems and storage hardware spending were in the lower third of

company priority lists for 2002. Nevertheless, chip manufacturers are now

betting on the return to strong IC growth in 2003. This reinforces our view that

the technology industry is approaching the bottom of the correction range.

Today, systems and subsystems purchasing leverage belongs to the buyer. By

mid-2003, that leverage will disappear, as the technology sector of the economy

finally recovers and pricing returns to normal. Plan your buying accordingly.