Wednesday, July 06, 2011

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.

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