Tablet Display Production Ramp

According to research house Displaybank the production of Tablet PC Panels grew 28% from the end of April to the end of May.

We are just starting to hit the ramp phase for the Tablet business. Today we hear from Cisco and their "Cius" Android Tablet. Yes, Cisco is getting in the game with everyone else.

The holiday selling season is right around the corner and all those products that were announced earlier this year are about to hit the shelves of a store near you.

Here are a few more notable points from the press release:

• Total Tablet PC panel production rose to 6.43 million units - up 28% month-to-month.


• 5.38 million 9.7-inch panel displays - the size used in the iPad - increased 26% month-to-month.


• 10.1-inch panel shipments recorded 986K units, showing 37% month-to-month increase. The panels will be used in Samsung's Galaxy Tab 10.1.

And now, a bit of eye-candy (click image to enlarge):



The Source: 'Monthly Large-area TFT-LCD Panel Shipment Data Report',

Is it really a surprise? 9.7 inch panel production is 84% of the market! That really speaks volumes (pun intended) about the dominance of the iPad.

Chip Industry Pulse - The Presentation Parade

Below, for your weekend reading enjoyment, you will find a set of links to some technology company presentations and a few stories from around the modern InterTubes.

Many of the company presentations contain the same message - tough sledding is expected for the next few quarters. But never fear, you will also find optimistic expressions about the long term view.

Samsung's Presentation from last night

• Reuters provides some additonal color (There's a link here! It's just not showing up)

Taiwan Semiconductor Presents

Here's a Global Foundries Video - (friends tell me they love marketing). And while we're at it, here's a presentation from Semicon West on 450mm - apparently they've moved it up on the priority list.

Speaking of the foundries - here's a roundtable discussion about multi-foundry strategies.

Lam Research Quarterly Report Presentation and their Analyst Meeting Presentation given at Semicon West.

I tuned in to the Lam conference call. The comments that stuck out for me centered on lead times. Here's a snippet:

"In addition, given the relatively short lead times for most equipment, customers have the ability to better time their deliveries to match the expected demand environment. As a result, even with overall healthy wafer fab spend levels, we expect a quarterly shipment variations in the range of plus or minus 25% will be experienced. "

Excerpt from Seeking Alpha

Shipment variations like this will drive those estimating quarterly earnings nuts and, to some extent, rendering them meaningless. Investors will have to finesse their trades - stepping in to buy when things look terrible and selling when things look great. It's the nature of the beast…..

KLA-Tencor was out last night - hear that echo? Slowing….

Think back to earlier in the year, during CES and Mobile Congress. Every company was blowing hot air about the 28nm ARM processors they were going to deliver for this year's holiday selling season. Well, 28nm has been a big challenge for the foundries and the high volume production ramp for many of those designs has been pushed out in to next year. An excerpt from the KLA conference call is in order:

Unknown Analyst -

Okay. One last question. On the 28-nanometer ramp, compared to the 40 nanometer, we know that foundries have suffered quite a bit on the yield issue in 40 nanometers. Based on what you've seen on 28, is the yield issues getting more difficult, or it's pretty much at the same level?

Richard Wallace (KLA CEO)

When I talk to customers -- and we have a lot of conversations the last couple of weeks, I'd say more difficult, more challenging. And 40 was interesting because as you know, a lot of people are going to do 45 and then they move to 40, and they were surprised by how difficult the yield was. And that was the catalyst for a lot of business for us. But if you look at 28, it's actually harder. Now they're a little more aware of the challenges, but we're getting pushed very hard to bring out our latest capability and technology to get it in line because I think our customers are pretty aware that they're missing critical defects in areas that are going to cause problems for them. And there's also a metrology challenges. So I think more difficult and a lot of interest in technology buys. And obviously, if we did have a prolonged softening, I think the technology position for K-T plays pretty well into that space because of the yield challenges they're seeing. No question.

Excerpt again from Seeking Alpha

Forecasting firm IC Insights has lowered their estimates for this year's Worldwide Semiconductor Market :

"Although the U.S. debt ceiling and European debt crises are likely to be addressed without creating a worldwide financial panic or meltdown, both of these situations have caused a great amount of uncertainty throughout the world, affecting both businesses and consumers alike. The problem with uncertainty in the marketplace is that it typically results in "hesitation" and "worry" for consumers and businesses. This environment of hesitation and worry is not conducive to good economic growth and can sometimes have a worse impact than if the negative event itself took place!"

A picture from the release:



All in all, a tough week - and I didn't even bother to touch on the mess in Washington. Keep the faith though. It will get better. Technology and chip manufacturing will continue to roll forward - with a few bumps along the way. Today's sentiment clearly lands on the bearish side of the ledger. That's a good thing if you are looking to pick up some bargains.

Your Investment Brain

Here's a humorous/insightful Presentation from Barry Ritholz on Equity Investing. Definitely worth a view:

Agora Vancouver BRAIN 2011.

Comments are more than welcome!

A SEMICON West snippet: AMAT launches new products, prepares for 450mm

A SEMICON West snippet: AMAT launches new products, prepares for 450mm - ElectroIQ.

Still digging through the stories from the last few weeks. With Lam Research reporting this evening it's worth reviewing what Applied Materials had to say at Semicon West. Lam, no doubt, will echo some of these sentiments.

Highlights:

• Eight new products


• Soft Industry Outlook in the Near Term


• Long term Applied is bullish (no surprise here)


• Over $100 million to be spent on 450mm development in 2012


• Reiterated that 450mm will happen. (This week I've been talking with several industry folks that work with Intel and they are saying the 450mm push is on - I'll come back to these discussions in another note)


• Foundries have fab shells ready but are in a lull. Applied did say they could come back quickly though. (My $0.02 - The foundries have not been spending much money- in fact, by some estimates foundry orders in the 2nd quarter 2011 were at their lowest level since the third quarter of 2007 and the 1st quarter of 2006 - this does exclude the horrific low made in 2009)


• DRAM companies are also reluctant to spend - noting weakness in the consumer PC market.

I've been expecting a year end bust-the-capital-spending-budget but given the questionable macroeconomic environment I'm beginning to wonder if that is going to happen. Granted, not everyone is holding back. Intel is still investing heavily - which is really not unusual because they typically invest counter-cyclically. Some folks are even going as far to suggest that Intel is on allocation.

Many of the reports and comments I have received are suggesting that the next upleg for capital spending will be pushed out in to the early months of next year. That's not that far away when you think about it. I say this because the stocks tend to start moving before the cycle kicks in. If the script plays out like it has in the past then it might be a good idea to put these on your radar screen. When confessionals are over - Applied reports in August - we might see some bargains out there.

SEMICON West - Test in Transition: Changing Customer Requirements

If you are investing in the ATE (Automated Test Equipment) sector there's a must read series of presentations at this link:

SEMICON West - TechXPOT North Two: Test in Transition: Changing Customer Requirements.

Several comments from the presentation made by Dale Omhart (Texas Instruments) really stood out:

Test contribution to total semiconductor manufacturing costs continues to INCREASE

Memory Test cost may have decreased by 50% in the last 10 years

In most cases, Test does not add value to the finished chip:

• This is especially true in NonMemory products


• Therefore, any test cost is painful to chip makers

Semiconductors are becoming more customized:

• There will be a very few high‐volume applications


• Big consumer products like iPhone (being an exception)

This evening ATE provider Teradyne will provide investors with an update of their business. The Teradyne report follows right on the heels of the quarterly release from Advantest. If you will recall, Advantest recently closed the $1.1 billion acquistion of Verigy. Their report was solid but the outlook, like so many in the semiconductor food chain, they expressed caution about the future. Orders are expected to decline and sales will be flat. The report, with notes, is here:

Advantest Presentation with Notes

From slide 12:

"...semiconductor manufacturers are shifting to a wait-and-see stance on capital investment and utilization rates are falling, in step with deteriorating end-user demand for PCs, smartphones and other products."

"In non-memory testers, the company expects demand will remain high, led by the MPU test segment. However, softer demand is foreseen in the communications and consumer electronics device test segment."

This last bullet is telling. The MPU market is where you find Intel and the folks that are cracking out ARM processors. It's also a place where Teradyne is very strong and I am sure they will say something about this in their report and on the conference call.

When Getting Bigger Makes You Smaller

I've been spending some time with the presentations given at Semicon West this afternoon. What I am particularly interested in is the amount of money companies are going to have to shell out to stay in the game. Years ago I wrote some pieces about the memory business - calling it a "No-Limit-Poker" game. This particular poker game had a twist - the ante went up every hand and you had to play every hand. If you left the table, you were out of the game.

Well, that analogy held true over the years. In the mid-to-late 90's the rising stakes flushed the Japanese right out of the DRAM business. Sure, Toshiba is in the memory game but at that time I was focused on DRAM. NAND Flash was just a blip on the radar screen.

Does the analogy hold true today?

After Intel said they were raising their capital spending budget (again) I thought a bit of a review of some of the predictions from last week would be appropriate. Yesterday I pointed to a 450mm panel discussion at the MCA BrightSpots Forum. Today, I've dredged up some comments from the folks at Gartner.

At the 450mm Panel Session Bob Johnson (no relation) had this to say:

Why 450mm?

• Equipment for each node costs more than previous nodes


• Periodic wafer size increases needed to compensate for more expensive nodes


• Can save 30% on production costs (target)

450mm has nothing to do with Moore’s Law. It's all about economics.

Later in his presentation he mentions the narrowing number of players:

Less than 10 companies are currently building leading edge fabs:

• 1-2 Logic IDMS (Intel and Samsung)


• 2-3 Foundries (TSMC, Globalfoundries, plus UMC or SMIC)


• 4-5 Memory Companies (Samsung, Hynix, Toshiba (w. Sandisk), Micron/Nanya/Inotera, Elpida/Rexchip

The semiconductor equipment companies say they will be ready when customers decide to make the move. I am sure they will - after a lot of kicking and screaming. The development costs are going to be enormous. Several suppliers that I talk with on a regular basis are now saying that 450mm has been moved up on their priority list.

At another session called "Contemporary Packaging: Challenges and Solutions for 40nm and Beyond", Gartner's Jim Walker served up some more food for thought:

The Bottom Line on Design Complexity is:

• Increased costs combined with reduced growth will cause significant consolidation in chip vendors…


• The industry will lose nearly one third of all semiconductor vendors by 2020

Wow! One-third going out of business? Well, that must all be due to, yes, you got it:

The Increasing Scale of Manufacturing

Here is the bottom line:

• Between the 45nm and 8nm nodes, logic fab costs will double to $10 billion. But a 31x decrease in cost per transistor will be maintained.


• Only four companies will be able to follow Moore’s law by 2018


• The annual number of new fabs built will fall by 60% between 2011 and 2015


• By 2015 foundries will account for about one third of the value of all semiconductors compared with about one quarter today


• By 2012, over 50% of packaging/test (SATS) will be outsourced


• By 2015 collaborative R&D will save the semiconductor industry over $30 billion in annual R&D expenditure

Well, ain't that just peachy? We'll be down to four companies that can pursue Moore's Law by '18? So, all the development work for advanced lithography (EUV) - in addition to the 450mm transition - should really come out of 4 buckets. I mean, who else other than Intel, Samsung, TSMC and perhaps Global Foundries, has the skin to step up and play that game?

I can see the number of new fabs falling off - I have no issue with that. Why build a new fab when you can buy an old one? Old fabs and fab tools don't die - they just get refurbished and reused. It doesn't just happen with really old stuff, it even happens with 300mm wafer process equipment. Texas Instruments is fine example - they are cracking out analog parts with tools from the first 300mm DRAM fab (the fab was once owned by Infineon and then eventually spun out as Qimonda - TI bought the equipment for a fraction of what it originally cost in a firesale).

I have a lot of questions about these predictions and I am definitely open to hearing what others think.

Feel free to chime in!

Roundabout

A smattering of stories that have hit my inbox this week and this morning (your mileage may vary):

Nokia Rises, Q2 EPS Beats, Steps Up Cost Cuts

My $0.02: The bar of expectations had been lowered, perhaps even buried, to a point where it was impossible to trip over.

*.*

IHS iSuppli talks DRAM pricing and capex:

“In the wake of forcefully pursuing lithography reductions in late 2010 and early 2011, the DRAM industry is expected to employ a less aggressive approach to lithography migration throughout the rest of the year,” said Dee Nguyen, memory analyst at IHS. “DRAM capital expenditures are expected decline by 30 percent in 2011 compared to 2010. As a result, the rate of DRAM cost reductions also will slow during the remainder of 2011 and 2012. However, IHS expects that DRAM cost reductions will speed up again in 2013 as lithography shrinks return, due to increased capital spending. Spending will increase by 23 percent in 2012, which may spur steeper price reductions in 2013.

Delays in DRAM shrinks have ramifications for ASM Lithography, Tokyo Electron, Applied Materials, Lam Research and others in the semiconductor capital equipment business. Thank goodness Intel is bellying up to spend some money.

Before leaving this, one more thought. I've been talking about the "quarterly" focus and how it can cause you to lose sight of what is really taking place. Here's another quote from the IHS iSuppli release:

"Surprisingly, DRAM suppliers remained profitable in the first quarter, boosted by the substantial margin built up during the previous up cycle for the market, which began in the second quarter of 2009 and lasted until the end of the rally a year later."

Right on queue, two Taiwanese DRAM houses announce first HALF losses and capital spending reductions:

Nanya Technology suffers 1H11 net loss of nearly NT$17 billion

"Nanya expects a capex of NT$12 billion in 2011, shrinking 47.8% form 2010. With 42nm being mainstream technology currently, Nanya brought 32nm process into trial production in July 2011."

And this one as well:

Inotera Memories sees 1H11 net loss of nearly NT$8 billion

"Inotera expects a capex of NT$17 billion in 2011, shrinking 69.1% form 2010. The proportion of total input of 12-inch wafers for 42nm technology increased to 50% in June 2011, Inotera said. Inotera said it will start trial production based on 30nm technology in the third quarter and kick off volume production in 2012."

*.*

This morning:

Microsemi Makes Hostile Bid to Buy Zarlink

There will be more deals. Bet on it.

*.*

Yesterday, from the mighty metropolis of Danbury, Connecticut, semiconductor material supplier ATMI hit the wires. CEO Doug Neugold had this to say about the second half of the year:

"However, we agree with reports that suggest there may be incremental softening in overall wafer starts in the second half of 2011. ATMI's focus on leading-edge solutions should help minimize the impact of any industry softness in the second half."

The full story is here: ATMI Reports 2nd Quarter and First Half 2011 Financial Results

ATMI is a nice company. Keep an eye on it.

*.*

And another nice company from the North East:

MKS Instruments comments on the second half for their semiconductor business:

"After a robust first half of the year, we are seeing some softening in the semiconductor market as the record shipments of the last few quarters are assimilated and brought on line."

The morning stock chart for MKS is a total hoot:

http://finance.yahoo.com/echarts?s=MKSI+Interactive#symbol=MKSI;range=1d

*.*

To round out the day, something from the wildlife, er, Solar, front:

4 Major U.S. (Solar) Projects Get Approval

"U.S. Secretary of the Interior Ken Salazar recently announced the approval of four new projects on public lands, the launch of environmental reviews on three others, and the next step in a comprehensive environmental analysis to identify 'solar energy zones' on public lands in six western states."

Animals that have a vested interest in these projects include: Mohave Ground Squirrels, the Desert Tortoise, Burrowing Owls, Flat-tailed Horned Lizards, Sage Grouse, Golden Eagles, Bats, Kangaroo Rats, Milk-Vetch, Fringe Toads and Horn-Tailed Lizards.

There will be more.....

The Ridiculous Infatuation with Quarterly Earnings

I've mentioned this before but I really want to reiterate it again.

"The practice of estimating quarterly earnings has become the lowest common denominator of all the tasks an analyst can bring to the table."

We've seen it in the past and we are seeing it this quarter. While the stocks may react for a day or two it's noise. It's ALL NOISE.

So far this quarter (and these are only the big names):

Google blew their numbers off the spreadsheet. IBM smashed expectations. Apple wowed the street - literally knocking the ball out of the park. Today, Intel beats, raises, and tells the world that global demand is strong and getting stronger. They are talking openly on their conference call about growth in markets that are not well understood. Brazil is about to become the 3rd largest market for PCs. Have we heard anything about that? The company has been talking about this for a number of quarters and yet the wires are peppered with reports that the PC is dying, they have missed the mobile opportunity and their processors will be replaced by the processors used in smartphones and tablet computers.

Did any of this happen? No. Just the opposite - a record quarter and higher guidance.

What's the lesson here?

It's easy to get frustrated by quarterly perturbations and a focus on the short term can cause you to lose sight of the big picture. For most investors it is best to think longer term. The best way to do that is to simply step back and look around. Look at the proliferation and functionality of the electronics that surround your daily lives. Think about what has happened over the last twenty years. Look at the last ten years. Take a few minutes to imagine what things will look like in 10 years. Think about the companies that will be building that technology. Will Google, Apple, IBM and Intel be involved?

I'm just mentioning these four tech giants although there are many others out there. To be brutally honest, you don't have to look very hard to find them.

Before you read and act on a report that talks about quarterly earnings stop for a minute and make a decision as to whether or not you are in this for the long term or if you are in this to profit from the quarterly masturbation(s). If you are in it for the long term then don't confuse activity with results.

LinkFest: Impressions from Semicon West

"It's all about the toys… the valves, the bearings…"

Bruce Billett - Technical Specialist (Intel - Ronler Acres)

Semicon West…. Held each year at the Moscone Center in San Francisco it is the largest trade show for semiconductor equipment suppliers. Along with Semicon there was Intersolar, the largest US Solar trade show.

It all happened last week.

Anyone who follows the semiconductor capital equipment business knows that last week was a rough one for the sector. During the Analyst meetings Senior Executives openly talked about a significant, 20% to 30%, drop in bookings for capital equipment. Although this quarter looks ugly, each company was optimistic about the long term outlook. The dynamic product cycle will continue to push chip manufacturers to purchase wafer processing tools that can produce chips with smaller and smaller feature sizes. Moore's Law will continue - so, they say. There's no reason not to believe them. But, like always, there will be cycles.

Loren Sutherland (Zone 5 Marketing), long-time friend, SEMI Committee Member, and beer drinking buddy, was kind enough to provide a couple videos from his time at Semicon. For those interested in some "Impressions" I thought I would point these to your attention.

The first video is an interview with Bruce Billett. Bruce works as a Technical Specialist for Intel. (Apologies for the low volume of this recording).

Impressions from Semicon West: Interview with Bruce Billett

To start, Bruce makes some interesting comments about InterSolar. Take this for what it is worth - Intel is a chip vendor and Bruce has a focused agenda but given that he is a "Technical Specialist" I think it is worth a mention. At the 1:40 mark he says that there are 256 Vendors doing the exact same thing.

My thought: 256 vendors all doing the same thing? Wow! That doesn't sound appealing! Is it any wonder the industry is in such disarray? It probably goes without saying but I am expecting a big shakeout in the solar industry over the next few years.

As for the semiconductor equipment business, here are a few more bits from the conversation:

The trend over the last few years is to bring very little equipment to the show. Way back in the halcyon days of Semicon having a tool in the booth, a booth that typically had company police guarding the entrance, was fashionable. A lot of this is just a matter of cost. Like Bruce, I believe that there really is no benefit to showing equipment at Semicon - you can't demonstrate what the equipment is capable of doing so what's the point?

All is not lost. Semicon provides attendees with the ability to meet with representatives from the major OEMs and to explore the offerings from smaller companies. From that perspective the show is still attractive. This is particularly true for someone like Intel who brings new technology in on a "pull-through" basis. While there are no guarantees just being visible at Semicon opens the possibility to getting an invitation from Intel. If you don't get an invitation it is very, very difficult to break in to their supply chain.

Right around the 4:50 mark Bruce said he was interested in "Finding the new small company that is making this new wafer holder or new wafer transport system."

Hmmm…. You get the sense he's looking for 450mm solutions.

The next video Loren provided is an interview with Dean Freeman, Research VP with industry research house Gartner.

Impressions from Semicon West: Interview with Dean Freeman

Dean talks about many of the same trends that Bruce mentioned - the ability to network, the large presence of companies that supply to the equipment houses and the "is it worth the cost" dilemma faced by the OEMs.

At the 9:00 minute mark they break in to a discussion about the future of Semicon. This is a big issue and something that SEMI has been wrestling with for the last decade. Does the rising interest in solar force SEMI to put InterSolar on the center stage? Does SEMI eventually move the semiconductor equipment industry to second fiddle over at Moscone West where InterSolar is currently held?

Speaking of SEMI, Loren also had a chat with retiring CEO Stan Myers:

Impressions from Semicon West: Interview with Stan Meyers

A tip of my hat goes Stan's way for his friendship and all the things he has done for the worldwide semiconductor industry. He's a great guy and I will never forget the times we crossed paths in hotels and airports around the world. Hopefully I will see him again soon.

The last item on today's linkfest is, for those of you really, really interested in the 450mm wafer size transition, an audio of a panel discussion that took place Monday (7/11) at MCA's BrightSpots Session. This session discussed the pros and cons:

MCA BrightSpots 450mm Forum (free but registration required)

We now return to our regularly scheduled programming…..

All that Cash!

Late last night I took the time to listen to Horace Dediu discuss Apple's growing cash position and their "What should we do with it?" dilemma.

The Critical Path #3: It’s Good to Be King – 5by5

This is a fascinating discussion for the times. I say this because it touched on how important it was for Apple to control their supply chains in the Post-PC era.

Sure, there are other options. They could buy someone but the history of M&A (A often standing for Attrition) is not that good.

They could implement a share buyback and an extraordinary and/or ordinary dividend. These seem viable but during the call Horace discussed studies showing how stock buybacks are typically not that rewarding for shareholders. He specifically mentioned Microsoft and their 2004 actions. If you will recall, Microsoft grew a monster pile of cash and in the summer of '04 they announced a $3 per share dividend (costing $32 billion), doubled their annual dividend to $0.32/share and a 4 year, $30 billion stock buyback program. After Microsoft announced these activities the stock traded at $28.32. Aside from a rally in to the mid-$30's in late 2007 Microsoft's share price has been range bound.

Here's a story from the day: Microsoft to Pay Special Cash Dividend

Looking at the results you can hardly question why Apple has not pursued any of these measures.

So what do they do?

I would not be surprised to see Apple get more aggressive in managing their supply chain. There are some major changes coming to chip-making land over the next few years. One of the major transitions is going to be the move to 450mm wafers. The R&D needed to make 450mm wafer fabs is going to be enormous but based on some conversations I've had with folks in the trenches and stories you can find on the web the migration to even bigger silicon wafers is starting to happen.

There's a fascinating discussion taking place on LinkedIn's Semiconductor Manufacturing Group and it appears that even the EU, yes, the EU, is going to try and push 450mm forward:

KET (Key Enabling Technologies) Report brings European 450mm Nearer

Next week, during Semicon West, several 450mm wafer sessions are scheduled. This one should be interesting:

450mm Wafer Transition Forum

"The latest version of the industry roadmap calls for the transition to 450mm to occur in 2012. While that timeframe will likely be adjusted, there has been more concrete indication of chip-maker commitment to advancing the transition. Intel announced that its D1X facility slated to open in 2013 will be 450mm compatible and TSMC has indicated that a 450 mm pilot line could be seen by 2013 or 2014. IMEC and ISMI have well established programs focused on the challenges posed by manufacturing with 450mm wafers. With increasing customer interest in a near-term 450 pilot line development, many critical elements have to be coordinated if the vision of a ramp to affordable high volume manufacturing is to be realized. In this session, industry experts will review the R&D initiatives that may lead to fuller implementation of 450mm wafer processing and provide a status of the prevailing challenges for device makers and their suppliers."

Well, this is going to be a tough transition no matter how you slice it. Progress is being made but not nearly enough. 450mm will happen…. It's only a matter of when.

So let's conclude this by getting back to Apple. It’s pretty clear they have and will continue to have a supply chain issue. Semiconductors are certainly not the only component in short supply. Screens are a huge issue.

With all that cash, and if they really want to paper the world with their gadgets, wouldn't it behoove them to make a few investments with the folks in the 450mm supply chain? Based on the other options I've noted, M&A, stock buybacks and dividends, this might be something to give serious consideration.

You have to wonder if discussions are taking place right now.

Lowering the Bar

Pre-announcements. Mid-Quarter Updates. Estimate revisions. Rating changed. Price target moved.

A few weeks before earnings season kicks in to high gear there's always a parade of analyst reports that hit the streets and they all pretty much sound like this: "Our proprietary channel checks suggest that XYZ is having a few troubles this quarter so we are reducing our estimates and our price target. We expect next quarter to be better…. "

You've seen it before. Lower the bar before the report so the company doesn't trip over it.

This is the dance that many publicly traded companies and Wall Street play each quarter. Note I said many. There are a few, like Apple, that don't appear to play this game.

Over on the Big Picture site there's an article appropriately titled "Reporting Season Farce".

It's worth a read. Here's a brief quote to kick things off:

“It’s that surreal time of the quarter, just ahead of the reporting season, when US companies cajole compliant analysts into reducing their profit forecasts so that on the day the company can record a positive earnings surprise.”

The rest is right here: http://www.ritholtz.com/blog/2011/07/reporting-season-farce/

I mentioned the misses that hit a few of the companies in the semiconductor sector yesterday. The slowing is becoming much more visible so don't be surprised to see more estimate cuts in the coming weeks. These will happen prior to the actual earnings release - of course.

It's probably worth revisiting the comments I received from Pip Coburn about the quarterly game. I don't think you can repeat this too many times:

Wall street rewards companies that play the stupid quarterly key performance indicator game because it is lowest common denominator — it takes ZERO thought… They “made” or “missed”… Reward/punish, play again…

SHAME on boards of companies if they don’t see the paradigm and stay clear of it and there ARE many companies that DO avoid merely becoming a series of key performance indicator tactics masquerading as “strategy”.

Congrats to Cisco for waking up – (my add here – have they really woken up?)

They (Cisco) may find that they need a fresh start with “investors” and there may be a period during which ALL the old investors have to be flushed out and the right new matches must be steadily made… Kinda like a juvenile drug addict being told he has to give up his old “friends” and find new ones. The old “friends” weren’t really friends but rather facilitators of the addiction.

I couldn’t agree more…….

The Novellus Rumor

Short, sweet, and to the point. The rumors about Novellus becoming part of an M&A transaction seem to surface every couple of years. Will Tokyo Electron step up to the plate? What about the now-infamous rumor of Lam and Novellus merging? That one has been a fixture for probably 15, maybe 16 years. What would they call the company? Lamellus?

Is there anyone else?

Today's story (rumor) comes from Investor's Business Daily:

Chip Process Supplier Novellus: Acquisition Target?

A couple of notable quotes from CEO and Chairman Rick Hill:

"We work with Lam and Tokyo Electron to solve customer needs," he said. "They have etch technology. We have deposition technology. The combination of those two technologies is critical.""

"We're not out hawking the company. We're a public company. Anybody who wants to buy the shares is free to buy the shares," he said. "Nobody in the company is trying to thwart it or make it happen. If it makes sense from a business sense and shareholder value, management always acts in the interests of the shareholders."

Maybe these deals make sense this time around. The rumors about a much-needed consolidation have been around forever - they pretty much spawn the individual transaction stories. Aside from some trading rallies chip equipment companies have pretty much spent the last 10 years in the Wall Street doghouse. A few deals might serve to liven up the sector. Applied Materials, obviously, felt that Varian Semiconductor was reasonably valued. (What happens with this deal remains to be seen - my fear is that Varian's high margins and favorable business position will get compromised a bit once they are fully engulfed by, what some call, the industry's Evil Empire).


We will definitely know more about the state of the chip equipment business next week during Semicon West. That trade show brings back some memories. During the 2002 session semiconductor companies were closing fabs and shutting their pocketbooks. It was dismal. One morning I was crossing Mission Boulevard, on my way to the Applied Materials Analyst Briefing, and who should I run in to but Rick Hill. He was dashing off to a meeting but we had a few words. I asked him, "How's it going?" He replied, "This ain't the 90's."

His comments in the IBD story are much more optimistic:

He likens today's growth cycle to the long one from the mid-90s to early 2000s. That cycle was marked by multiple drivers, not least of which was the worldwide rollout of the Internet.

Hill thinks the current cycle could also last about seven years, with five more to go.

One can hardly argue with the "multiple-driver" state of today's end market for semiconductors. Then again, if the company is truly an M&A candidate would you expect him to be anything less than optimistic?

Early Indications

A couple of stories have hit the wires over the last few days that are a precursor to the "inventory warnings" you should expect to hear during the coming round of confessionals (earnings season). In Sunday's WSJ "Samsung Sees Tough Second Half for Components" Samsung executive Kwon Oh-hyun was quoted:

"In the past, the semiconductor market tended to be weaker in the first half and stronger in the second half, but for this year, it is likely to remain flat throughout the latter half."

Weaker sales of semiconductors and flat panel televisions were cited as the primary culprits.

The worldwide analytical community has picked on the story and are going as far to warn about this quarter (which makes sense because chipmakers are typically the last to find out that the end markets are slowing down):

Samsung to Log Lower Q2 Profit

"Samsung Electronics Co. will likely report lower-than-expected earnings for the second quarter, hit by flagging demand for TVs and slumping display prices, analysts said yesterday."

Do you think those analysts read the WSJ article?

Not to be outdone, Taiwanese test and assembly house Silicon Precision Industries guided lower earlier today:

"Company COO Tien Wu suggested in a recent report that sales of ASE's packaging and testing unit for June may be lower than previously expected due to inventory correction in the supply chain."

The article also includes some rather pessimistic thoughts about demand for the third quarter from SPIL's Chairman Bough Lin.

So this is the news from some of the biggest players in the semiconductor food chain. What does it mean?

One would expect similar sentiments to come from the folks at Amkor and Advanced Semiconductor Engineering. Along with those "competitors", it is probable that some of the TAP (test, assembly and packaging) equipment companies will talk about slower sales. Folks like SPIL, Amkor and ASE are very run-rate focused and the lead times for the equipment they use are not that long. A few names from the group that should feel the impact: Kulicke & Soffa, Teradyne and Agilent

Last but not least, Merrill Lynch is (still) talking lower utilization rates at Taiwan Semiconductor. This is not surprising - they've been saying this for several months now.

Like clockwork, the group comes under pressure right before earnings season.

My take - keep some powder dry. Allowing for a few exceptions, I don't think the forward views we hear this quarter will be all that spectacular.