We're Leaning the Same Way

We're Leaning the Same Way Earlier today I posted a bit about the Semiconductor International forecasting webcast that will be released tomorrow. Here's a bit of follow-up on that session. There were eight analysts on the call today. The format was a roundtable discussion with the first question asking for our semiconductor industry forecast for next year (certainly not a surprise question in a forecasting session!). As most of you know, I don't release or calculate an *exact* percentage growth rate when I do these things because I consider doing so an exercise in futility. Of course, a number of the forecasters do this and from time to time they have hit the nail squarely on the head. I really respect their ability to do this - just as long as they hit the nail consistently. As for me, I prefer to focus on the trends that drive profits to the bottom line. Whether or not I have the exact forecast figure for the whole industry during one particular calendar year is really meaningless. Have to say, this was a pretty general talk. We touched on the "maturing" industry theme (something I talk about all the time). We discussed wafer size transitions - will we move to 450mm? We touched on scaling limitations and the collision between silicon technology and nanotechnology. We talked about end market drivers. We talked about the weakness in ASPs. We haggled a bit about the big players and the cost of getting a device to market. In 45 minutes or so we covered a lot of ground. We really could have used more time. As I see it the run-rate of the chip industry is in pretty good shape. That does not necessarily mean that profits are flowing freely it means that business is good, not too low, not excessive. The industry still has issues but overall business conditions are not too bad. We should enter next year in pretty good shape. Part of the reason for this is that there's lots of caution out there. Hand-to-mouth is probably the best way to describe how companies are managing device inventories and fabrication capacity. It's not a universal state but as part of a big picture it's very good news. It would be silly not to say that there are pretty severe excesses in some of the commodity arenas. Not everyone is singing the same tune. Not everyone is enjoying pricing power and not everyone has their business strategy in order (and who knows if they will ever get one together!). No doubt, it's a very challenging environment. My answer to the first question (I shouldn't put these things in print!) was pretty basic: Barring the possibility of economic dislocations that could disrupt consumer spending next year will be an up year for both semiconductor sales and capital equipment. Being purposely vague I stated that percentage growth in the high single digits was in the cards. I realize that's not saying much for the equipment industry because this year was a down year. Even though popularly quoted utilization rates show fabs running pretty hard capital investments are being pursued on an as-needed or, incremental pace. Then there's the cost of playing the game. Paying for a state-of-the-art fab these days is something very few can afford. In a follow-up call to a friend I mentioned something that I found most notable about the call: We are all leaning the same way. Not a down forecast in the bunch. Oh sure, everyone is aware of the possibilities (slower consumer spending, housing bubbles, higher interest rates, etc....) but no one has a down forecast for next year. That's bothersome because typically when we all lean the same way we are wrong. I remember a forecasting session I moderated in August '00 all too well. Similar scenario.... And you know what happened.

Forecasting Season

Forecasting Season Tomorrow, Semiconductor International and a group of forecasters will release a webcast that contains an outlook for the semiconductor industry. The discussion will be held in the form of a roundtable. Links to the session are available in the "check this out" section on the first page of the Semiconductor International website: http://www.reed-electronics.com/semiconductor/ Might as well while I am at it... Here's a direct link to the registration page: http://www.reed-electronics.com/semiconductor/index.asp?layout=article&articleid=CA6289209 This should be a pretty good session. I've participated in roundtable discussions with most of the panelists in the past - usually as the moderator. This time I get to chip in a few nickels. Hope you can tune in! Carl

Trends in the Semiconductor Equipment Business

Trends in the Semiconductor Equipment Business What are these numbers? (click image for larger version) These numbers are the three month averages of billings and bookings for North American Based Capital Equipment Companies as reported in SEMI's Express Report. It's no wonder the Front End stocks have been acting so punk. The trend in the TAP sector looks pretty good but one has to admit that the TAP segment has been through a period of severe under-investment. A solid bounce was in the cards. The question is, will quarterly guidance for a 5 to 10 percent increase in Front End bookings send the stocks higher? In an environment where device makers pursue "incremental capacity additions" you have to wonder if there is a driver for substantially higher equity values. Incremental improvements? Maybe. I am not expecting anything spectacular. Charts for Chart Watch are under construction. I will post them this afternoon.

Semiconductor R&D Spending Trends

Semiconductor R&D Spending Trends Yesterday SEMI hosted a webcast to present a whitepaper written by INFRASTRUCTURE afflilate Ron Leckie. The paper takes a hard look at the trends in R&D spending in the chip industry. Here is a chart that we will be talking about over the coming days (click on the image if you would like to see a larger version): Is there concern? You bet. Though many will not talk about it publicly, next to the water coolers inside chip, chip equipment and materials companies, one hears the "rest of the story." Frankly, I thought Ron covered the details of his findings nicely during the webcast. Unfortunately the discussion following his presentation danced around the major issues. Typical..... The full paper is available at the SEMI website. It is highly recommended reading for those investing in the sector. Carl

Upgrading to Interesting

Upgrading to Interesting What can I say? For those that visit this site you know that I have not posted anything about the electronics, chip or chip equipment industry for a while. I downgraded it to boring on 6/25 - which really meant "no further comments necessary" - and left the party (if you want to call it that) to enjoy the summer. Of course, that's not really true. I've been involved with the semiconductor industry for so long that it is literally impossible to attempt short a term break. I could not get away - no matter how hard I tried. Went on the annual trek to Semicon West in July, participated in a couple of mid-season forecasting sessions, spent hours on the phone talking and e-mailing with people who run businesses embedded up and down the manufacturing food chain. Some of those talks were with people outside of the electronics industry. Read a lot, learned a ton..... Please don't misinterpret the title of this post as a recommendation to buy the stocks. I'll get into the why of that question later. We've held the stocks for a long time, riding out the little ups and downs of the last few years. It would be hard to grade the trading action as interesting. I know, I know. I downgraded to boring and right after that share prices jumped out of the range and, in a measured way, ran to higher ground. Fundamentally things did not change. The capital equipment industry is enjoying a seasonal blip in tool orders. The semiconductor makers have been in their production ramp for the holiday selling season. A number of technology issues are testing the process technology front (as always). The supply chain continues to be stressed. I could go on and say, higher energy prices, higher interest rates, housing bubbles, and all that other jazz were also visible back in June. They were and in time, I suspect, they will develop into more significant issues for the end demand front. Let's leave that alone for now.... What I mean to imply when I say, "Upgrading to Interesting" is that there are a lot of signs that things are about to change on the business strategy front. That strategy change does not mean we are going to see a spike or bust in semiconductor and semiconductor equipment bookings and shipments. Remember, a seasonal move in order patterns should be expected. Even if it is just a bounce off this year's lows. Even if it carries into early next year. We see it coming. It's here right now. That's all short term. The longer term changes I see have to do with the speed and aggressiveness of companies as they adjust their business models to the dynamics of a mature industry state. A few months ago I would have said that electronics industry executives are being dragged, kicking and screaming, toward some hard decisions. Not anymore. The light bulbs are on. Encouragingly, I found during my talks with industry people over the summer that more and more are embracing and adapting to this change. More than anytime in the past. Simply put, that's why this period is now so interesting. There is actual movement and the one's that are moving are going to become the winners. It's sad that it took so long. Some of this stuff we have been talking about at this site for years. At the same time, it's good that we are now moving forward. Blogs are being updated today. Stick around. Carl

Semiconductor Sector Rating Change: Neutral to Boring

Semiconductor Sector Rating Change: Moving from Neutral to Boring The chart below tells the tale: Maybe the summer months will bring an end to this consolidation. Have to admit, this range in the SOX, about 60 points since December '04, has been pretty uninspiring. The rallies come on during the middle months of each quarter. After a bit of hype and hoopla those that are pounding the table are pushed back under the water by the realities of quarterly reporting season. Of course, the picture below this (see post made June, 16), shows forward earnings for the sector and that leaves a little to be desired. One can get really fancy with the way they interpret this action. In my view it's just a matter of understanding that there is noise. A lot of noise - all the time. Felt like saying something. I will now put my ear back to the ground......

Who Wins the Services Race?

Who Wins the Services Race? Following on to the "Industry Maturity" post made last week, I thought it would be appropriate to mention a news release made on June 22 at the Sematech website: http://www.sematech.org/corporate/news/releases/20050622.htm Basically, Sematech is setting up a tool, spares and services database for member companies called the Competitive Sourcing Database. "This database will help the members of SEMATECH and ISMI improve the key areas of our spares cost reduction initiatives, including competitive supplier sourcing and greater availability of repair and refurbishment services," said Al Garcia, a former SSC chairman. Hmmm... If you are an OEM should you be concerned about this? I would be concerned. Particularly if you have yet to grab your "share of wallet". Everyone that can supply parts, repair, refurbishment and tool maintenance is going to get pitted against each other - compared and benchmarked in one database. More from the press release: "This unique supplier database will help our members improve their efficiencies in the equipment spares supply chain, while reducing their equipment cost of ownership," said John Schmitz, SEMATECH Vice President and Chief Operating Officer for Manufacturing Technologies. In particular, Schmitz said the database will benefit members by providing such advantages as: * More cost-effective procurement and management of spare parts * Pre-screened, capable, competitive sources for spare parts * Lower costs for equipment maintenance * Increased return on investment (ROI) for member companies The second and third bullets, in my opinion, have implications for OEMs. Everyone knows that spare parts and maintenance services have been a high margin business for many in the industry. As I see it, the goal of the Sematech site is to make the competition visibile - doing so helps their member companies. Clearly that is going to have implications for pricing. Can you picture a fab manager looking at the database and then going back to the OEM saying, "XYZ company here in Austin, Texas (or, somewhere in Taiwan/China), is willing to provide the same parts and service for far less than you are proposing. If you want my business, make me a deal!" This whole thing harkens back to the Otis Model I mentioned in last week's post. It seems obvious that OEMs must get their arms around the market - what is in the field - and then pursue a strategy that leverages the existing channel without creating total chaos. Sematech, with this program, is forcing the issue. Nothing like a little exposure.... Carl

Semiconductor Manufacturing: Is the Industry Maturing?

Semiconductor Manufacturing: Is the Industry Maturing? A few years ago, during one of SEMI's Industry Strategy Symposiums, I participated on a forecasting panel. The subject of "semiconductor industry maturity" was discussed. The topic hit hot buttons with a number of the panelists. A couple of the panelists stated that there was no way the chip business was entering a mature state because we had barely scratched the surface of innovation. It's hard to argue with that view, innovation is not dead. That said, even mature industries innovate. The Automobile industry creates and manufactures innovative features all the time. Is Automobile manufacturing mature? Most would say yes. In my view the answer to the question of whether or not the chip industry is mature should not center on innovation. It should center on the profitability of the industry as a whole - which, based on the chart below, is not as good as it has been in the past: Source: www.Yardeni.com The chart says: Profits made manufacturing "Dwidgetal Devices" are dwindling (sorry, couldn't resist). While others will argue against it, I believe the industry is and has been, maturing. If you scroll down to the other posts on this page you'll see that I've written about the growing push by chip equipment suppliers to grow the "services" portion of their business. I've also talked about equipment life cycle management and the older capital equipment used in fabs around the world. What does all this say about the chip industry? Does the increasing OEM focus on services suggest that the industry is maturing? I think it does. There's a nice whitepaper over at the Diamond Cluster website on this subject. The paper talks about maturing industries and how companies must shift strategies to gain a share of "Wallet" or, as we like to call it around here, the "Monthly Check." Here's a great chart from the paper - one that should be hanging on the walls of semiconductor equipment companies: Source: Diamond Cluster A case study in the paper highlights the way the Otis Corporation developed their services business. It's relevant because Otis had a large customer base but had lost control of relationship. Independent service providers, a number of which were ex-Otis employees, had grabbed a large portion of the services market (where the entire margin resides). Recognizing that they were losing control of the service business Otis embarked on a program to capture the customer need without disrupting the existing channel. From there they used the knowledge they gathered to understand what exactly was in the field - which opened up new sales opportunities. Does this scenario sound familiar? There's definitely a bell ringing. Frankly, I don't see many in the equipment business approaching the services market like this and they are facing the same scenario. In fact, I don't know if there is a good estimate of the amount of equipment that is installed in the field. (If you know who has one let me know - I am all ears!) Maybe there are a few that see the light but if they are they are not making their presence very visible (press releases do not count!). I find it ironic that semiconductor equipment service companies, particularly those providing spare parts, refurbishments and inventories of older equipment, can be found advertising via Google. I recently added some AdSense links to the Resource links and the Tutorial at this site. It's notable that very few OEMs appear via these links. In a maturing industry you can only beat your supply base to death so many times. At some point you have to acknowledge that conditions have changed. As for services in the semiconductor equipment business, it is clear to me that there is a market out there. Seeing potential in the services market (wallet/monthly check) is one thing, grabbing a portion of it without creating total chaos is another. Right now I think the strategies that many are pursuing leave a lot to be desired. Don't expect too much..... I'll write more about this in the days ahead. Carl

Pass The Popcorn

Pass The Popcorn Watch the movie... It's flying around the web - linked throughout the blogosphere. The message, if you like to think via big pictures, probably has implications for your business. The latest version of the EPIC Movie, the movie that portrays Googlezon taking over the world sometime during the next decade, is out. You can get the movie with a straight download from this link: http://blog.pegasusnews.com/files/epic-2015-thompson-sloan.swf, If you do not have it you'll need to download and install Macromedia Flash Player to view. If you are really cool and on the cutting edge, you can get it fast through your BitTorrent client at this link: http://robinsloan.com/blogtorrent/btdownload.php?type=torrent&file=epic-2015-thompson-sloan.swf.torrent Pretty cool.......

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Think far out... I mentioned the era of the Dwidgetal Device world in the post on May, 27. Today a fellow analyst sent me a link to this article by the Register about a group that has put Skype on a Thumb Drive: http://www.theregister.co.uk/2005/06/08/skype_on_a_thumb_drive/ As you can probably tell I am quite enamored with what is happening with Skype right now. The business, with an estimated 40 million registered users, is gathering a lot of voices, ears, and most recently available through a plug-in developed by a third party, eyeballs. Paint a picture.... Here's a link that guides you to Free WiFi locations: http://metrofreefi.com/. Free is best. If you choose to pay for access, there are plenty of options. WiFi is everywhere. Intel recently released their survey detailing the top 100 Unwired Cities in America. Link it together. Free WiFi - including the access points that are being funded by municipalities who, in their infinite wisdom, believe their communities should be connected. Add in the WiFi access now being allowed on Airplanes. Skype embedded in a Thumb Drive that before you know it will be dense enough to hold all the things I have on my computer. Skype embedded in a Motorola designed wireless phone. Use the free WiFi to make free VOIP calls via Skype. Toss in a few more dwidgetal devices: A projection keyboard, Bluetooth headset, and you have to wonder if you really need to lug around a laptop. It's all good. Yes, everyone wants to make a phone call. No doubt about it. The problem I see with this is in the business model. How do you make money from a set of services that only requires the user to fork out some pocket change for a few bits of hardware? Have to say, a lot of this reminds me of the trends that gripped tech in the late 90's. "Get a free PC when you purchase an Internet connection!" I suspect we'll learn over the next few years that these transitions will have a huge impact on the profitability generated by INFRASTRUCTURE companies. And when I say INFRASTRUCTURE companies I am not limiting my thinking to the companies in the semiconductor, semiconductor equipment or flat panel display industries. One of the sectors that could, once again, be put on its knees is the telecommunications industry. Dwidgetal Devices..... Enabling communities, companies and countries to connect from anywhere. All for free.... $0.02 for the jar - (Hey! Don't complain! That's more than the cost of making a Skype call to someone on the other side in the world!) Carl

The Consumer IC Market:: Dwidgetal Devices

Posting before the weekend..... Before my presentation to SEMI Austin this past Tuesday I was browsing the gadget sites. This wandering included: Engadget, Gizmodo, Slash.org, Russell Beattie's Notebook and Mobitopia. I am getting RSS feeds for all of these via Bloglines. Yeah, I know, too much time spent at these sites results in information overload. With so many sites out there you have to wonder how many people suffer from internet-induced attention deficit disorder (ADD). But back to the point. The primary purpose of these gadget sites is to preview, review and discuss, the latest and greatest electronic gadgetry. In the near term this is a noble and overwhelming cause. Whether the sites survive over the long run remains to be seen. For now, they are in the game. The sites are not the issue though. What I find most interesting is the seemingly endless stream of product flow they have to digest. For our purposes, this product flow should be noted as the primary driver of growth in the Consumer IC market. This category is making a profound influence on the business model of the chip manufacturing community. I sense that the answer to "who will survive and thrive in the electronics food chain?" can be found in this arena. One of my fears is that the answer is charging at us like a mad bull and it will blindside us before we have time to react. Calling it the Consumer IC market is boring. I've decided that from now on I am going to call these items "Dwidgetal Devices" because, these products are, for all intensive purposes, digital widgets. There's a story here and I have not quite got my arms around it. The Widget Maker - the classic B-School case study. Hmmm..... Comments?

The Right Questions

The Right Questions "Equipment Life Cycle Management" will be addressed in a panel discussion at the Strategic Business Conference this week. This is a subject that is near and dear to my heart. The content is quite relevant to the post I made Thursday (the post is below this message - it's called "Capacity Observations"). Fortunes have been made procuring and selling the excess equipment produced during the bubble years. It's not just the excess production that generated this wealth, equipment from fabs that were shutdown was also purchased by distributors and channeled to many different companies in the chip manufacturing industry. Most in the industry know that China's device makers have absorbed a lot of these tools. One could even go as far to say this market is really the driver of the semiconductor manufacturing ramp in China. The quantity and even the capability of the tools moved through these channels should not be under-estimated. Complete fabs have been auctioned and then resold. As one example, Motorola shut down more than 20 facilities, both back and front end, during their reorganization. There are many, many others that have done the same. OEM capital equipment companies have also been moving tools into the market. Some of these are older tools but a great percentage are tools that were used in development labs. For many device manufacturers development lab tools are a great deal because their capabilities often exceed the process requirements used in their fabs. Personally, I think device production from this "recycled" capacity is greatly under-estimated by many that follow the industry. I also believe that this business is something that has a great influence on semiconductor capital equipment spending ratios. Why? Because the equipment sales numbers used to calculate capital spending ratios is based on sales reported by global OEM tool manufacturers. The numbers do not include sales made by entities that buy and resell equipment purchased at fab auctions. The numbers also do not include the tools that refurbishment houses send back in to the market. Recent announcements from OEM capital equipment companies make it pretty clear that this older, but still production worthy market, is something that must be acknowledged. That interest is what prompted the SBC Committee to put the "Equipment Life Cycle Management" panel discussion on the agenda. Here's a backgrounder on the discussion that will take place at SBC: Today, approximately 40% of global device production capacity is on 6 inch or smaller wafers and >20 year old device technology (>0.5u). And, 64% of all fabs globally are >8 years old, with global average fab life of 12.8 years. These facts present some difficult challenges to the Semiconductor device manufacturers and the OEMs that supply the equipment for the fabs. Did we really expect that these conditions would prevail 20 years ago when those earlier technologies and equipment designs were first installed? Were the Semiconductor manufacturers' asset depreciation models based upon fab and equipment lifetimes of 15 to 25 years? Were the OEMs' support strategies designed with this extended life-cyle in mind? What is the true market life of a device technology? What is the true useful life of semiconductor capital equipment? Clearly, in the case of the newer leading edge fabs the focus is on CapEx and ROI. In the case of the more mature fabs, the focus moves to OpEx. Faced with these realities, what are the strategies that the device manufacturers and the OEMs should pursue to insure the greatest return for their customers and their shareholders? Great questions.... Let's toss in one more, contributed by one of the panel participants representing a device manufacturer: What other suppliers come into play with mature equipment in addition to the equipment OEM and the original leading edge device manufacturer? These could include other device manufacturers with different product portfolios, third party parts and service suppliers, licensed (or unlicensed) third party equipment suppliers, etc. There is a whole different value chain here other than the original one. Lots of things to consider here. I know, I use this quote from Bob Dylan a lot but it seems very appropriate, "The times, they are a changin'" In the publications I send to readers (subscribers) and the various blogs at this site I am going to write a lot more about this. It's a huge issue.

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Silicon Shipments: SEMI Q1 Data Another item related to my "Capacity Observations" post last Thursday hit the wires late in the week: SAN JOSE, Calif., May 5, 2005 – Worldwide silicon wafer area shipments decreased less than 2 percent during the first quarter 2005 when compared to the fourth quarter 2004 areas shipments according to the SEMI Silicon Manufacturers Group (SMG) in its quarterly analysis of the silicon wafer industry. Total silicon wafer area shipments were 1,465 million square inches during the most recent quarter, down from the 1,486 million square inches shipped during the previous quarter. The new quarterly total area shipments are 4 percent below first quarter 2004 shipments. "Coming off of a record year, we expected and experienced a slight drop in unit shipments during the first quarter of 2005" said Makoto Tsukada, chairman SEMI SMG and general manager of Shin-Etsu Handotai Co., Ltd. "However, we continue to see strong sequential growth in 300 mm wafer shipments."

Quarterly Silicon Area Shipment Trends Silicon Shipments- Millions of Square Inches

	Q1 2004	Q4 2004	Q1 2005
Polished	1,130	1,114	1,107
Epitaxial	336	314	307
Nonpolished	63	58	51
TOTAL	1,529	1,486	1,465

The numbers for next quarter, I suspect, will be even more interesting.

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Comments and questions are welcome.

Capacity Observations....

Just returned from a trip to Grenoble, France to present an industry outlook at the Brewer Science Lithography Symposium. Beautiful place. Great meeting. To say that I learned a bit during my trip is an understatement. The notes I took will go in the issue of the newsletter I am working on right now. Next week is SEMI's Strategic Business Conference. That should be a great session with a number of first-rate presentations and two very timely panel discussions. Details about this event can be found at SEMI's website: http://www.semi.org and in a post a bit further down this page. I'll be taking a lot of notes about this session and they will be complied for the reading enjoyment of fully paid-up subscribers: http://www.infras.com/monsub.html

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Capacity Observations.... Here's a set of observations that I think we should give some consideration as we look at the current rate of capital spending and semiconductor industry capacity: One of the big concerns that I have mentioned about the capacity front is the potential for incremental yield improvements taking hold in the manufacture of devices at 130nm and 90nm nodes. These observations are focused on the leading edge, where the majority of capital spending takes place, but similar yield improvements are happening across the larger nodes - particularly in China. An improvement in yields, say from 40% to 60%, means a 50% increase in final die output. Okay, simple enough.... This is taking time to happen because process, design challenges, and the move to 300mm are making this particular migration along Moore's Law a much more incremental transition. Capacity brought about by increased yields should not be under-estimated. I could lean to more optimistic on the yield front for these technologies and bump current manufacturing yields to 50%. A 5% improvement in yields from that level, 50% to 55%, generates a 10% increase in final die output. This may not seem like a lot but the compound average growth rate of industry unit volumes is right around 10% per year. In talking with people in the industry influence of improving yields is quite a concern and too often overlooked. It's also a concern for investors although and I think it is a reason why the semiconductor capital equipment spending ratio is not as higher percentage of total semiconductor revenues as it has been in the past when we are setting highs in chip sales. Today semiconductor sales are tracking around all time high levels. There are a wide range of projections this year. Many think chip sales will be flat, slightly up, or slightly down (the U, V, W, or Canoe thing....) Let's forget forecasting for the moment. My point is, unit and revenue generation by chip companies is hovering around last year's run rate even though we are not seeing a big increase in the capital spending ratios. Fab utilization rates, as popularly measured by the SIA and others, have been going down (one forecasting body is saying they have flat-lined recently). Based on what we've heard in this quarter's earnings reports utilization rates are probably heading lower. Now that is interesting. How can utilization rates go down when chip sales are near record highs? I think as we go forward it will be important to factor yield improvement into the equation. I mentioned that a 50% increase in die output is possible if we see a 20% jump in final yields. This is quite plausible and it allows you to paint a very interesting scenario: Companies can actually cut wafer starts as yields go up and still see increases in final device production. There are other things lurking in the shadows that will probably exacerbate the capacity situation. A few weeks ago Merrill Lynch published a study showing the last two years of foundry capacity additions. The top 4 foundries increased capacity about 25% in '04 and 30% in '05. Would it have been necessary to put this amount capacity in place if yields on their 130nm and 90nm processes were higher? Hmmm...... Seems to me they are compensating for lower yields - although some of this could be attributed to the transition to newer wafer processing technologies. But if yields go up.... Uh oh! Yes, time will tell. One more thing to add to the mix is the efficiency of today's process tool vs. the tools of the past. Tools are much, much better - and this is aside from the fact that they are processing larger wafers. I've heard from one OEM that some of their tools are 50% faster than they were 4 years ago. Then there is the automation aspect... Wafers are being moved more efficiently (at least that is what the automation companies will tell you). What am I saying here? I believe these factors will ultimately translate into lower equipment sales - and that is what we see in the capital spending ratios. The industry is getting more bang for the spending buck. Oh, I don't doubt that we'll see another equipment order "dogpile" because it is inherent in the psyche of the chipmaker to chase market share and Moore's Law - despite the capacity situation, the economics of the market, and the financial consequences. Certainly the possibility of one more round, perhaps a muted one, of equipment purchasing for the sub-90nm regime is plausible. Generally though I see the end market for semiconductor capital equipment narrowing further because of the technological and financial challenges of moving to 65nm and 45nm. The pace of migrations along Moore's Law, with exception taken for the aggressive pursuit of it by Intel, appears to be slowing. I realize that some of this might not be clear or, even seem like a stretch to many, so I'll try and polish the viewpoint a bit more over the coming days. Feedback and questions are welcome.

Skypeable

I am now Skypeable.... If you are a Skype user and are interested in chatting with me, click here: If you are not a Skype user, you ought to consider it: http://www.skype.com After this scrolls down a bit I'll put a link on the sidebar......

Yahoo Group, Blogs, RSS and the Newsletter

Yahoo Group, Blogs, RSS and the Newsletter Comments on some new features: I have been publishing for 11 years now. It is still a challenge to deliver useful content to a very diverse readership. From push to pull technology, plain text e-mail to PDF to websites to HTML e-mail to blogs to RSS feeds. What's best? All you can eat? Anything and everything? It's definitely a challenge - as much for the publisher as it is for the reader. I am going to rephrase a few things from a piece I'll cite below so bear with me for a moment: All too often publishers and analysts work from the premise of what they are able to deliver, or need to deliver, rather than what the consumer actually wants/needs. A thought that is appropriate comes from Richard Stastny's list of ten Skype lessons: "you can compete with everyone, but you can't compete with your customer." When I look at the subscriber base here I see customers that fit into some well-defined categories. There are busy executives and employees from the technology industry who prefer to have periodic, weekly or monthly data, in concise, compact forms - delivered right into their e-mail client. In other words, they do not necessarily want or need a daily site feed from a blog or an e-mail discussion group. On the other side of the spectrum there are members of the Wall Street community and the individual investor camp. I have found that this group, particularly the individual investor, prefers a constant stream of news and commentary in addition to a newsletter. To serve the news hungry group this site has several blogs and a front page RSS feed. To further enhance the flow of material through the site I have set up a Yahoo Group called INFRASTRUCTURE Blogs. Subscribers to INFRASTRUCTURE are welcome to join this group. Here is a link: http://finance.groups.yahoo.com/group/infras_blogs/ If you are a subscriber and would like to join send me an e-mail requesting membership. I will send you an invitation. I want to be clear and say that the Group features are not necessarily appropriate for all of our subscribers. Basically it is designed for those that want a very heavy flow of information. The Group mailing list receives all of the content posted in the 4 Blogs at this site. Members of the Yahoo Group have the option to receive a Daily Digest rather than individual e-mails for each post. If you are not a subscriber, information on how-to-subscribe (at very reasonable rates) can be found here: http://www.infras.com/monsub.html As for the newsletter, that will still be published in Acrobat form, e-mailed to subscribers and archived here at the site - if I might add, also with more frequency. If you have any questions about these features, or, what is best for you, please feel free to contact me. Oh! Before I go, some of you have probably read the post I referenced and have re-phrased in a few sentences above as this one from the EuroTelocblog called the Masque of The Red Death. I think the things that are happening here at this site are relevant to some of the comments made in the article. James Enck, the author, had this to say about a presentation he gave at the Marcus Evans conference on Strategic Pricing for Telecom Content and Services in London: One slide of my introduction contained a quote from Edgar Allan Poe's "The Masque of the Red Death". For those who haven't read it, basically the idea is that a decadent regime is hiding behind thick castle walls from a plague which is devastating everyone outside, diverting itself by having a masqued ball. Just keep dancing and we'll be fine. An interloper appears, and the king demands that he be unmasked, but the intruder (whether he is merely a carrier of the disease, or embodies some karmic revenge, is unclear) turns out to be the harbinger of doom, already among them. Okay, my use of it was partially tongue-in-cheek, but I had a serious point to make: your assassin is probably already inside the castle walls and you may not even know it. Now, to be fair, my audience of around 50 marketing/strategy people from various European carriers were clearly very bright, successful people, undoubtedly very busy, and probably with heavy expectations upon them to deliver in very fluid markets. However, in my introduction, I asked for a show of hands in response to a series of questions, and was somewhat concerned by what I found: How many of you read blogs? - (three out of 50) How many of you feel you understand what RSS (I gave the long form name as well) is? - (none) How many have heard of BitTorrent or eDonkey? - (Perhaps 5 - 7 hands) How many have used BitTorrent or something like it? - (only one or two sheepish hands) How many have heard of KaZaA? - (Almost everyone - I pointed out that this was the old school) How many are acquainted with Skype? - (Just under half) How many use Skype or have used it? - (Around a quarter) I pointed out that the list I had just run through was a fair representation of some of the most popular activities of broadband users, and in every respect represented some threat to what the telcos are trying to do strategically. We had some laughs along the way, but there were also some long faces as the implications of my message sank in. Full post, a great read, is here: EuroTelocblog : The Masque of The Red Death ------------- Food for thought.

Satisfy Me.....

Satisfy Me A little less conversation, a little more action please All this aggravation ain't satisfactioning me A little more bite and a little less bark A little less fight and a little more spark Close your mouth and open up your heart and baby satisfy me Satisfy me baby Elvis...... http://www.infras.com/news/satisfyme.mp3 Earnings season in full swing. I am posting this right before the Intel quarterly release. A little less conversation (about the 2nd half recovery) and a little more (upside) action would be welcome. Last week, April 8 to be precise, I posted a Chartwatch for subscribers that detailed the slowing business conditions in the chip and chip equipment markets. Those charts showed how IC unit volumes were rolling over. The study also highlighted the "W" or, "canoe" shaped action taking place in the chip equipment sector. We have not heard much to dispute the expectations set forth in that letter. The stocks continue to waffle back and forth as the analytical community, bifurcated as they are, wrestle with possibility of the industry bottoming. Some are saying we are heading to new lows. Equity valuations are given some note but generally it is a matter of if the recovery will occur. Investing ahead of the recovery and everyone else is fashionable. A great deal of the news released during earnings season is keeping us from being "satisfied." While many will focus on the IBM report we can list a host of items that show weakening business conditions. Here's a partial list, in no particular order (some of these are borrowed from an ongoing Technology Matrix Report tabulated by Doug Rudisch of Bain Capital): ASM Lithography - no visibility into the second half (This was mentioned in the letter I mailed 4/08. That report also talked about the view from the Japanese capital equipment companies); Novellus - meets expectations but the street does not like the margin story and during the analyst conference call Chairman Rick Hill says he is concerned about the economy. I posted a bit about this in the Stock Blog; Teradyne and the other ATE vendors are getting clocked because the street is expecting weak orders for the quarter. Teradyne reports after the close and will host a conference call tomorrow morning. IBM (everyone knows what that did to the market); Sun Microsystems - $120 million light of consensus (looks like trouble here); Dell and IDC (IDC the forecasting firm) indicate that PC sales growth has been slowing; Samsung - Revenues down a bit below consensus but profit margins were way off at 1.498tn vs expected levels of 2.103tn; Fairchild Semiconductor - guides below expectations after reiterating in their mid-quarter update, just 1 month ago, that business was picking up; Atmel - forecasts a loss on flat revenues. Today we have a story on Digitimes stating that the two largest foundries TSMC and UMC may have to lower their predictions for second-quarter growth due to a weaker-than-expected PC market and a decrease in orders from US wireless communications equipment makers. This is despite the fact that consumer electronics growth is expected to be up 5-10% this quarter. Here are a few other notables: Infosys - The number one Indian Service Provider cites weakness in financial services vertical integrations and guides lower; Foundry Networks - The network equipment and services company said it expects to report quarterly earnings per share of 6 cents to 7 cents, well below its previous forecast of 8 cents to 12 cents. They chopped their revenue outlook to about $84 million from projections of $100 million to $110 million. The company said that sales to north american enterprise customers were below forecast (last tally of the networkers showed they were 0 for 5 this quarter). There were a few good reports, Texas Instruments and Lam Research seem to be holding the line but the number of companies that are missing and some of the news about future demand beckons for a little less conversation, a little more action..... Please.... More shortly - including some comments about the Intel earnings report.

US Electronic Store Retail Sales vs. IC Units

US Electronic Retail Sales vs. IC Units Trouble on the end demand front? While the stabilization in the early months of this year could be called encouraging, the recent comments from Dell's Kevin Rollins, who said that "PC growth is slower than expected" is cause for concern. A chart for your perusal: More charts are available in the letter posted here: http://www.infras.com/infra/letters/infras040805.pdf

Round II: U, V, W or Canoe

A friend sent me a note this past week saying, "I am surprised we have not heard more about the shape of this recovery from the sell-side analyst community. Is it going to be a U, V, W or canoe?" Earlier this year I debated that very question. I am in the camp that expects a W shaped recovery for the chip industry. This is close to a canoe shape in that total levels, as measured by global semiconductor and semiconductor equipment sales, will probably not move up and down in any significant manner. The feature of the W, which is similar to the canoe, is that there will be pockets of weakness and strength in specific industry categories. W is another way of saying we’ll be hopping over the canoe seats, from the back to the front - hopefully moving toward another, stronger growth period. All the debate about when the next cycle will occur has caused a bifurcation in the ranks of those providing industry outlooks. There are those that are outright bearish, anticipating that business has changed forever and that stock prices will visit new lows. There are those that bullish, expecting the inventory burn to eventually push factory utilization rates higher. I didn't attend ISS (Industry Strategy Symposium) this year but some have told me that the really bearish believe that chip and chip equipment industry companies are incapable of finding their own shadows. I don't believe this is the case. That said, I am not going to argue that the chip industry has been in a major transition during the last four years. The rest of this piece, along with all the industry data charts, is available for subscribers here: http://www.infras.com/infra/letters/infras040508.pdf

SEMI: Strategic Business Conference (SBC)

SEMI: Strategic Business Conference (SBC) For the second year I am serving as Committee Chairman for SEMI's Strategic Business Conference. I really have a great group of people to work with - members and employees of SEMI that put in a great deal of effort putting this event together. This year I think the team has assembled a top-notch program. It's so good that I think it is appropriate to let INFRASTRUCTURE readers know about it so if they have an interest they can sign up before all the seats sell out. SEMI has set up a page on their site where you can view the agenda and register. The companies and speakers that will be presenting represent a who's who of the semiconductor business. SBC 2005 Keynote Speakers: * Joe Zelayeta, Executive Vice President, ASIC Technology and Methodology, LSI Logic * Jon Kang, Senior Vice President, Samsung Electronics * Wally Rhines, Chairman and CEO, Mentor Graphics * Robert Bruck, VP Technology and Manufacturing Group Director, Fab Capital Equipment Development Intel Corporation In addition to these speakers executives from Texas Instruments, SMIC, IBM, Renesas, Micron, STMicroelectronics, Nanotera, Infineon and National Semicondutor will take the stage. There will be two panel sessions at the Conference. The first, manned by Ken Rygler, will address the question of Designing for Profitability; Designing for Dollars? The second panel discussion is particularly germane to recent news: Equipment Life Cycle Management: Optimizing the Return on Assets for Legacy Fabs. That panel will be moderated by Dana Ditmore of Oak Valley Consulting. The program and the setting makes SBC one of the best networking events of the year. The conference takes place May 9-11, 2005 at the Resort at the Mountain, Welches Oregon. Check it out. If you have any questions, drop me a note. I hope to see you there. Carl

Two Takes On The Global Scene

Over at Tom Brown's website, Bankstocks.com, Eric Miller, once Chief Investment Strategist at Donaldson, Lufkin, Jenrette, has written a really good piece on the long term implications of China's growth. Definitely worth a read: http://www.bankstocks.com/article.asp?type=1&id=9880606 We all know that China's growth has huge implications for the chip and chip equipment companies - whether it be the delivery of the most advanced technology or the servicing (see yesterday's news from Novellus) of older generations. What I find most interesting is that the emergence of China as a chip making country has not pulled the sector out of the performance doldrums - just look at share prices!

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Then there is this short but sweet macroeconomic summary from Brookville Capital's Abraham Gulkowitz: Everlasting Bliss Hiring gains in the U.S. are still not spectacular when judged against earlier cyclical rebounds, but as underscored by the impressive gain in nonfarm business payrolls in February, there is enough evidence that the outlook in the U.S. remains far and away the best of the major economies. The U.S. economy's obvious resilience, combined with still relatively low inflation and the corporate sector's strong profitability, ample liquidity and access to credit - all characterize a wonderful business and financial backdrop. While the strong momentum is real, decelerating earnings, rising inflation, and gradually rising interest rates across the maturity spectrum may yet test this optimism. Low interest rates in all major economies, supportive forexreserves in Asia, declining credit spreads and docile equity market volatilities all point to an abundance of liquidity in the world economy and a "what me worry" risk attitude. However, a dangerous self-reinforcing circle has developed. Rapid reserve growth feeds back into the U.S. and supports low rates and a desperate search for yield. A high and rising appetite for risk in the global financial system, in turn, is nourishing strong growth in emerging economies, including China. The result is an unusual combination of amazingly low credit spreads and very high commodity prices. As commodity inflation and an ample risk appetite fuel speculative forces, the global financial system moves further and further into a domain where assets may become precariously overvalued. Imbedded in these developments are two obvious trends that we have highlighted previously --the rising role of housing's boom to feed consumption spending and the rapid expansion of manufacturing capacity in Asia. How's that for a summary take? Carl

Watching Paint Dry.......

It's like watching paint dry. Look at the chart below. It portrays the action in Applied Materials (AMAT) over the last two quarters. Nothing doing.... Going nowhere..... Boring.... Oh sure, there are a few investors that can trade these little ranges, pocketing a nickel or two here and there, but generally Wall Street, excluding the 30+ analysts that follow the company, is showing little interest. Something is missing..... Fundamentals? Perhaps so.... It probably will not be much longer before companies in the chip and chip equipment sector break out of these ranges. There are a few analysts out there that believe the break will be to the downside - pushing share prices toward the lows posted several years ago. A move like that would be shock for many long term holders. Personally, I don't find it out of the realm of possibility. In fact if it did happen I am hopeful that it happens sooner rather than later. Chart Watch and Model Comments are under construction. We're going to make some trades this week. Those comments, along with other items of interest, will be posted and e-mailed ASAP. Your thoughts are welcome and appreciated. Carl

Forecasting Roundup

*First Things First: A Straight to the Point Review* Have to say that I don't really feel like looking back on 2004 - particularly when I look at the stocks. It's got to happen though - even if it is painful. We all know that business in '04 was not that bad for those in the electronics, chip and chip equipment industry. In fact, if you just look at the year-over-year sales comparisons you could say that it was a great year. I mean, 50% up or so for capital equipment and almost 30% for total semiconductor sales are gains you can hardly sneeze at. The gains are nice but it never fails, when you think you've safely left the forest your compass breaks and it only takes a few wrong turns to find out that you are still lost in the woods. Ahh.... Nothing like a strong upturn to kick off the year and swoon at the end to leave you scratching your head. The smell of napalm in January..... Yes, we're entering '05 in the midst of another dowturn. Whether it turns out to be a U, V, W or canoe shaped recovery remains to be seen (see the 12/7/04 Chart Watch for some comments on the shape of the recovery). I know you all know is rough out there. The depth and breadth of this down cycle (rather amazingly some still do not believe this is a downcycle) is still one big fat question mark. Like you, I am hopeful that it will turn out to be a blip on the radar screen. I see plenty of good things happening with products for the end market but in terms of the investments that will be made by chip and chip equipment companies there is still doubt as to how 2005 will unfold. I am not alone. Many others feel the same way. As the post-holiday reports roll in we'll learn a lot more. The rest of my comments, if you have not received them via e-mail, are available in the Letters Archive...... More will be posted soon. So, stick around.