Gartner See IC Slowdown, Consolidation

SAN JOSE, Calif. — Gartner Inc. reiterated its bullish chip forecast for 2006, but the market research firm sees a slowdown and consolidation in the IC industry, according to Reuters on Wednesday (June 7). As previously reported, Gartner projected the IC industry will grow 10.6 percent in 2006 over 2005, according to the report. Chip sales, the firm said, will grow 14 percent in 2008, before falling to less than 1 percent growth in 2009, according to the report. Now for the bad news: Gartner analyst Jim Tully said 35 percent of existing chip makers — or about 350 companies — will be “driven out of business or acquired by bigger rivals,” according to the report. “The reference to a 35 percent reduction should have a 10-year time horizon,” Tully said in an e-mail. “We are saying that this number of vendors will no longer be shipping silicon by 2016. We are expecting many of today’s smaller chip companies to be acquired, become IP vendors or otherwise to exit.” And while most analysts are raising their semiconductor forecasts for 2006, one investment banking firm is bucking the trend and lowering its prediction amid a sudden and recent slowdown in IC shipments. In a report issued last Friday (June 2), Wedbush Morgan Securities Inc. lowered its 2006 semiconductor growth forecast from 11 percent to 10 percent. For 2007, Wedbush projects that the IC market will slow and grow by only 6 percent over 2006. Others have another viewpoint. The Semiconductor Industry Association (SIA) this week revised upwards projected worldwide sales of chips for 2006, and now suggests growth of 9.8 percent to $249 billion, up from its previous estimate of 7.9 percent growth to $245 billion. The SIA said the correction is mainly due to better than anticipated demand for chips by the mobile phone sector. The revised forecast also includes more optimistic projections for industry sales from 2006 through 2009. The Association says the semiconductor industry will grow by 11.0 percent in 2007, 12.0 percent in 2008, and 4.0 percent in 2009. The World Semiconductor Trade Statistics (WSTS) organization last month raised its semiconductor forecast. The global semiconductor market is expected to grow 10.1 percent on an annualized basis to $250 billion in 2006, according to the spring forecast of the WSTS. Projected growth in the worldwide semiconductor market will accelerate to 11.0 percent in 2007 and 12.8 percent in 2008, according to the organization. Mixed signals Besides a possible IC slowdown, there are some other concerns in the market today. Strong IC demand in the consumer-electronics sector will likely cause continued high prices — and supply constraints — in the high-end, chip-packaging markets, according to industry executives and analysts. The IC-assembly crunch has hit a number of chip makers, including Texas Instruments Inc. and FPGA giant Xilinx Inc. “We are expecting Xilinx to reiterate a 1-5 percent increase in sales from the March quarter,” said Satya Chillara, an analyst with American Technology Research Inc., in a report. Chillara’s estimates call for $486 million in revenue (up 3 percent) and $0.34 EPS in the quarter. Wall Street’s estimates are at $488M and $0.32. “Based on our checks, Xilinx has been taking steps to cut down the inventory levels since April and May. We expect inventory days to drop from 134 days to 126-128 days,” he said. “We are however cautious on the back-end capacity and gross margin improvement going into 2H ‘06. At this point, we are still hearing of price increases from the assembly and test industry.” Meanwhile, TI is expected to remain bullish in its upcoming mid-quarter update. “We expect management to guide the quarter to be in-line to above the mid-point based on the continued strength of the wireless division,” said Chillara in a report. The analyst expects TI to report sales of $3.643 billion and EPS of $0.45 in the quarter. Wall Street’s estimates are at $3.607 billion and EPS of $0.44. “Wireless has roughly 40 percent exposure in the semiconductor business. After booking $1 billion in revenue with OEMs in 2005, TI started sampling WCDMA merchant solutions in Q405, which we believe will be an incremental revenue driver in 2006,” he said. “According to our analysis, the DLP business is also rebounding within the seasonality patterns in Q3. With wireless strong going into Q3 aided by DLP strength, we believe Q3 could be robust.” “Fairchild [Semiconductor this week] reiterated its Q2 guidance citing seasonally normal demand, stable lead times, and stable channel inventories, all signs indicating a generally healthy semiconductor environment,” said Craig Berger, an analyst with Wedbush Morgan Securities, in a report. “With strong Q1 results, including significant gross margin upside and strong analog shipments, Fairchild is benefiting from tight supply chain management and investment in higher margin analog products.”