Analog, wireless sectors to outperform semicon market: FSA

CIOL: Please provide an update on the status of the global fabless semicon industry.

FSA: (Morgan Stanley) Industry Observation: The end of the supply-side cyclical correction in the semiconductor industry and the expectation for more favorable seasonality appears to be getting discounted by semiconductor investors. However, this is occurring in an environment when end market demand appears mixed, and the risk of a muted or sub-seasonal "recovery" is high.

(Merrill Lynch): Unit shipments came in stronger than expected, but ASP was weaker. For the quarter, Q2 billings represented a QoQ decline of 2%, which is worse than the seasonal average growth of 3%. Based on comments from various semiconductor companies, we believe Q2 marks the trough of this cycle. We continue to believe we'll see a strong rebound in Q3. Our full year estimate for 2007 of 5% growth in billings is unchanged.

(Jeffries & Co) We continue to believe that the Analog and Wireless sectors will outperform the overall semiconductor market in 2H2007.

The Analog sector continues to recovery with inventories lean and forward business looking strong and in-line with end demand now. PC demand is slightly better than expected with Notebooks particularly strong ahead of Intel's new Santa Rosa launch. Wireless chip supplier results reflect the weakness in Motorola but also indicate a seasonally strong 2H 2007 ahead.

(iSuppli – Aug 1)

Mobile handset growth remains vibrant in 2007 and is expected to end the year with a 10% unit increase. However, revenue growth will be only 5% as Average Selling Prices (ASPs) continue to decline.

Semiconductor revenue for wireless communications is said to have grown by grew by 14.2% in 2006, driven by the 20.7% unit growth of handsets. The 2007 semiconductor revenue growth for wireless communications will be 7.7% as the handset unit increase slows to 10%, one of the many factors behind the present slowing in the semiconductor market.

Demand for new consumer-electronics products over the past four years is also cooling; revenue growth for the consumer-electronics market dropped by about one-third in 2006, to 9%. And it is expected that growth will decline by more than one third in 2007, to a smaller, but respectable 5.2% revenue growth as the market slows and ASPs continue to plummet.

The wired communications segment is expected to post 3.1 percent growth in 2007 and automotive electronics are expected to post a 3.9 percent increase in 2007, a weaker trend than seen in recent years.

The industrial market rebounded to 8 percent revenue growth in 2006 as the military/aerospace, medical and semiconductor manufacturing equipment markets grew strongly. But industrial market growth has flattened in 2007, especially in the semiconductor manufacturing equipment sector.

Cavium - IPO

Cavium Exceeds Expectations Out of the Gate. Cavium reported Q2 revenue of $12.67M, exceeding our estimate ($12.35M) as well as that of consensus ($12.15M). Non-GAAP EPS of $0.03 compared favorably to our estimate of breakeven (and consensus at $0.01). Management guided for Q3 revenue to range between $13.7M-$14.0M (representing sequential growth of 8%-11%). We were expecting Q3 revenues (pre-conference call) of $13.8M, while consensus had called for $13.4M. It is important to highlight the fact that Cavium is at a point where revenue should accelerate, fueled by the broadband access and service provider markets. Longer-term incremental growth should come from the storage market. Despite strong growth and solid execution following the company's recent IPO (May’07), we are maintaining our Hold rating. We are looking for a more compelling valuation before considering becoming more constructive on the shares. (July 18, 2007)

Cavium stock price increased 45% since May.

 CIOL: Who were the major movers and shakers (or slips) among the top 25, and what are the reasons for those, in your opinion?

Qualcomm

•  Increasing foundry orders. A Digitimes article reported that Qualcomm will increase orders by 15-20% in the September quarter in order to meet projections of strong 3G handset sales. According to the article, sources at Qualcomm suggest that wafer starts per month in the December quarter could surpass 30,000.
•  Reports strong June quarter for 2007. Qualcomm’s $2.32 billion in June quarter sales represents 19% year/year growth. Record chipset volumes of 65 million were at the high end of 62 million-65 million guidance. UMTS chipset shipments were noted to have increased by 127% year-over-year and 79% quarter-over-quarter, with the quarter-over-quarter growth rate roughly 4 times the market growth rate.
•  Chipset ASPs increased by 2% year-over-year and quarter-over-quarter, and are expected to remain stable.

CIOL: How is the situation in Asia, and how does FSA see growth of fabs going forward in India?

(Source: Strategic Marketing Assoc. Quarterly Spot Report - July)

India Fab Announcement: In the eastern Indian state of West Bengal, the technology ministry announced plans for a yet to be named fab at the India Design Center.

Details: India Design Center/Prototype / Kolkata, India

Est. Construction Date: Oct 2007

Est Volume Date: Oct 2009

Product: R&D

Capacity/Mo: 0.5k

Wafer Size: 200mm

Cost: $75M

India Fab/Possible: NeST Group/Fab 1 / Kochi, India / $1 billion for 200mm 30k flash

CHINA: Strategic Mktg Assoc expects that eight new fabs will start construction in China this year. Two started construction in the first quarter (Hua Hong NEC and ProMOS) and two more started construction in the second quarter. Grace Semiconductor, which opened its first fab in 2003, began moving equipment into the shell of Fab 2, which was built at the same time as Fab 1. The company is installing used equipment and plans to begin production in Q1 0f 2008. The company also plans to begin building a 300mm fab, perhaps as early as next year, although financing remains an issue for such a project.

Also in China, IC Spectrum began building a 200mm fab in Kunshan, about 45 kilometers east of Shanghai. Using 0.35 micron technology from Toshiba, the new foundry expects to begin volume production by the first quarter of 2009.

TSMC began production in the second phase of its 300mm Fab 14 in Tainan in the south of Taiwan. This $2.4 billion fab will start production at 65nm and move to 45nm in 2008. There are also plans for a 300mm Fab 14, Phase 3 at the same location.

CAPEX - In 2007 the companies with capital spending budgets of $1 billion or more (the Billion Dollar Club) will account for 77 percent of all capital spending (see Figure 13). Most of these companies (thirteen out of twenty) are memory companies. Nine of these companies are from Asia Pacific (South Korea, China, Taiwan and Southeast Asia) and together they plan to spend $23 billion this year, more than half of what the Billion Dollar Club has budgeted for capital spending.

 Except for companies headquartered in the US, Taiwanese companies will outspend all other regional chip companies. Taiwanese companies are currently budgeting a 46 percent increase in spending this year to $12.9 billion, and could go even higher. We list seven Taiwanese companies that each plan to spend more than $1 billion this year. TSMC leads all other Taiwanese companies this year in spending. The company plans to spend $2.7 billion this year, an increase of 10 percent from 2006. The company plans to begin 45nm production at Fab 12 in early 2008 and is ramping production at Fab 14 Phase 2 in Tainan, Taiwan.

 CIOL: What were the reasons for the global 8 percent fall in revenue Q-over-Q?

Price pressures from intense competition in major market segments such as DRAMs, DSPs and NAND flash – key components of PCs, cell phones, and other portable consumer products, which are major markets for fabless companies – limited industry growth despite higher unit shipments for these products during Q1’07.

(Merrill Lynch): Unit shipments came in stronger than expected, but ASP was weaker. For the quarter, Q2 billings represented a QoQ decline of 2%, which is worse than the seasonal average growth of 3%. Based on comments from various semiconductor companies, we believe Q2 marks the trough of this cycle. We continue to believe we'll see a strong rebound in Q3. Our full year estimate for 2007 of 5% growth in billings is unchanged.

CIOL: Do you foresee a downturn in the semicon industry due to the above?

2007 Semiconductor Analyst Growth Forecasts

Company	2006-2007 Forecasted Growth	As of Date	Revised 2007 Forecast	Increased/ Reduced	As of Date
Advanced Forecasting	~10%	Jan 2007	1.8%	Reduced	June 2007
AG Edwards	10%-15%	Jan 2007	0%-10%	Reduced	Feb 2007
Cowan LRA Model	7.7%	Jan 2007	2.2%	Reduced	Aug 2007
Databeans	12.0%	Jan 2007	7.0%	Reduced	June 2007
Future Horizons	12.0%	Jan 2007	6%	Reduced	July 2007
Gartner Dataquest	9.2%	Jan 2007	2.5%	Reduced	May 2007
IC Insights	7.0%	Jan 2007	2.0%	Reduced	April 2007
In-Stat	10.4%	Jan 2007	7.9%	Reduced	April 2007
International Business Strategies	2.0%	Mar 2007	2.0%	-	Mar 2007
iSuppli	10.6%	Jan 2007	6.0%	Reduced	June 2007
Semico	7.0%	Jan 2007	-0.5%	Reduced	July 2007
SIA	10.0%	Jan 2007	1.8%	Reduced	June 2007
VLSI Research	4.6%	Jan 2007	5.0%	No Change	June 2007
WSTS	8.6%	Jan 2007	2.3%	Reduced	May 2007

Note: TSMC reported a 5-10% semiconductor growth forecast each year for the next 10 years, as a prediction to the growing consumer electronics market.