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Pedaling through the Cycle: 2Q11 numbers provide more questions than answers


The summer is never the easy quarter because it is the historically slow period for semi.  This year's added jitters from the US and EU economic (debt default) concerns have only added to the worries; worries which were already greater than normal due to the still fresh memories of the last recession.

As we've been commenting for the past couple of weeks here at MarketWatch, sectors across the semiconductor industry are seeing increased ASP volatility and conservative positions by manufacturers.  The reasons for these positions are simple at their core: inventories are beginning to show some build up (not yet troublesome, but definitely in the yellow-flashing-light range) while consumer and enterprise confidence is questionable to weakening.  There is an excess of product on the shelves from the continued market share battle among smartphone and tablet PC OEMs as well as the ongoing turf wars in the flat-panel TV market.

The translation of this situation is component concerns along most of the semiconductor value chain (see this for a mainstream view from The Baltimore Sun).  The problem arises when the jitteriness of OEMs translates into more conservative orders due to questions of what the back-to-school (higher) quarter will actually bring.  This conservative position was well noted in the recent SEMI data for June 2011 that came out this week here.  The book-to-bill ratio for June, as a three month moving average (MMA), for North American semiconductor equipment was down to 0.94, the lowest since February of this year when the ratio was 0.87.

Why are book-to-bill numbers important?  Simply put, they give us a concrete data position on how the industry is seeing demand as expressed by orders billed versus orders received (booked) for semi equipment.  Generally, we look for something close to 1.0 ($100 booked for $100 billed), the dips that we see in both bookings and billings, as well as the ratio dip confirms there is a conservative cloud and the possibility of softening.  That the ratio is not lower and the individual numbers not less, means there is still a wait-and-see strategy, confirming what we've been reporting lately here, here and here at MarketWatch.

As the second quarter (2Q11) earnings results coupled with second half (2H11) forecasts begin to come in now, we are seeing more data to support that we are in a "Mid-Cycle Pause," as termed by Credit Suisse in their recent report on the semiconductor industry: "2Q11 Earnings Preview: Head-fake, Mid-Cycle Pause or Downturn?" (p. 2, ff.).  What this means is that we appear to be in a period of "decelerating [year over year] growth without substantial absolute negative growth – hence a pause and not a downturn." (cf. Credit Suisse, ibid. p.2)

The implications for a 2H11 'Mid-Cycle Pause' for our industry?  Credit Suisse sums up what we are seeing across the industry analysts and component movement (inventory and ASPs):

"Seasonal patterns will not be the norm in 2H11 (note 3Q estimates already sub-seasonal) – macro headwinds, product transition timing, content and share gains will be a more significant driver, we think.  Normal seasonality could be structurally changing […].  [Apple] supply chain is likely to benefit from […] better than expected builds for iPads in 3Q and iPhones in 4Q, in addition Macbook Air refresh will continue […].  PC companies should post another solid quarter, confounding the skeptics that PC units have gone ex-growth and perhaps intensifying the cries of inventory and channel stuffing." (ibid., p.2)

The possible negative game changer: if there is a substantial, global economic "shock to the system" (e.g., debt default by the US and/or multiple EU countries (such as some combination of Greece, Spain, Italy, Ireland, or other)) (ibid, p.2).

We expect revenue and forecasts to be a real mixed-bag as they continue to roll-in, so be prepared for feeling the tug-of-war as you are hit with reports and news next week (for example, Motorola still sees trouble here, as does Ericsson here; Nokia and Android find trouble here; meanwhile Apple's results continue to be strong here; LG Display is down here; iSuppli's report on weaker small- to mid-sized panels here; Intel, Microsoft and IBM all up here and more on IBM here; SanDisk's positive results here; Acer shows a mixed bag but is forecasting growth based on moves into the cloud through M&A here; and AMD is gaining ground and market share here).  These initial results/reports are strong, and that is good and to be believed.  However, with many more semi companies still to report, it is important to consider the entire value chain as we wait for the not-so-bell weather companies to report as well.

Here at MarketWatch, we will be aggressively monitoring the data throughout our industry and providing you some ways to think about how those data translate into real changes that affect us in the semiconductor industry.

Lisa Ann Cairns, Ph.D.
Written on Friday, 22 July 2011 13:08 by Lisa Ann Cairns, Ph.D.

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