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Analysis: Has IC market really hit bottom?

Posted: 17 Apr 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Intel recovery? IC market bottom? microprocessor?

OEMs, corporate IT equipment buyers, consumers and industry analysts want to see the hard evidence before agreeing with Intel Corp. that the electronic market has hit bottom in terms of demand cutbacks.

Executives at the largest semiconductor company said in a statement announcing the company's first quarter results and in a follow-up conference call that demand for electronic components is no longer dropping as sharply as it did over the last six months, implying that sales could be on the upswing soon as manufacturers restock lean inventories and corporate IT buyers replace old equipment.

"We expect business conditions in the second quarter to mirror those in the first quarter with some gradual recovering of demand and replenishment of inventories occurring as the industry sees increasing signs of stabilization and a return to more normal seasonal trends," said Paul Otellini, Intel's president and CEO.

Rebound doubts
Otellini's optimism is hitting a wall of skepticism in the market place. Intel's stock price dipped more than 4 percent in after-market trading following the company's announcement of what appeared to be above-expectation first quarter results.

Similarly, a bunch of analysts covering the company indicated some disagreement with Intel's overall conclusion about the health of industry demand.

The sticky point was future demand in the face of continuing weakness in the global economy. With many regions of the world, including key markets in Europe and Japan, still fighting to turn their economies around, analysts are hesitant to conclude semiconductor sales will pick up strongly anytime soon.

In fact, many believe sales will remain flat and perhaps depressed until sometime in Q3 of the year at the earliest.

"Despite the relatively enthusiastic pronouncements by the chipmaker, TBR believes that Intel will face challenges to grow its revenue and maintain profitability in 2009," said John Spooner, an analyst at Technology Business Research in Hampton, New Hampshire.

"We believe that the new realities of the market will exert considerable pressure on Intel's processor average selling prices as end-customers, both businesses and consumers, look for the greatest bang for the buck when and if in the case of businesses they move to purchase new PCs," he said. "We believe that, for the most part, 2009 PC sales growth increases will be on the lower-ends of the spectrum."

Morgan Stanley Research analyst Mark Lipacis has a similar conclusion: "While Intel called the bottom in PC demand, it was uncertain about the trajectory of demand, and indicated that enterprises as well as Europe, Japan and emerging markets still appear to be challenged," Lipacis said in a report.

Intel itself has not said it definitely expects demand for microprocessors to roar back strongly in coming months. While company executives said demand has stopped contracting they also declined for the second consecutive period to provide revenue forecasts for the ongoing quarter.

Instead, Intel said it expects sales to be flat from the first quarter, during which the company recorded revenue of $7.1 billion, down 26 percent from the year-ago comparable quarter and 19 percent from the fourth quarter.

First quarter net income shrank by more than half to $647 million, or 11 cents per share, from $1.44 billion, or 25 cents per share, in the first quarter of 2008. The company's gross margin tumbled to 45.6 percent, an improvement upon Intel's forecast for "the low-40 percent" but down from 54 percent in the year-ago quarter.

Recovery underway
The company warned corporate equipment buyers are still holding off on new purchases and said demand in Europe and Japan remain depressed. The more price sensitive consumer market is helping to prop up demand, Intel said.

Intel is pinning its hope for future growth and margin improvements on several factors, including intensive cost-cutting activities, productivity increases, strong demand for next-generation processors, inventory replenishment at PC manufacturers and pent up demand from the corporate sector.

Additionally, demand visibility is beginning to improve, giving Intel a clearer look into future sales prospects, according to Otellini.

"The global environment hasn't changed but our ability to look at and plot some historical points has given us the confidence to essentially say that the industry has seen the bottom," said Otellini.

"Three months ago, we were sitting in a fragile global economic environment and we had just come off a horrendous fourth quarter and we weren't sure of [future] PC sales," he added. "Three months later we're still sitting in a fragile global economic environment but we've got three or four months of fairly good trending in terms of where the business is, what the inventory levels are, what geographies are still buying product and what segments are still buying products."

- Bolaji Ojo
EE Times

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