Nanotech - The Circuits Blog

Updated at 12:20 p.m. PST with additional information about salary cuts.

Nvidia is buying up underwater stock options from employees and cutting salaries across the company amid a steep revenue falloff.

On Tuesday, the graphics chip supplier posted a fourth-quarter loss of just under $148 million and a 60 percent drop in revenue as demand for its graphics chips dried up.

"November fell off a cliff," said CEO Jen-Hsun Huang, addressing the decrease in demand, during an earnings conference call Tuesday. Chief Financial Officer Marvin Burkett added that "December was worse."

In the aftermath of its earnings report, Nvidia's stock fell over $1, or more than 12 percent, on Wednesday. Shares closed at $8.15 on Wednesday.

In response to an extended decline in its stock price, Nvidia said this week it will take up to a $150 million charge in the first quarter to buy underwater stock options from employees, not including board directors and certain executive officers. The offer commenced Wednesday and will expire on March 11.

"As of January 25, 2009, there were approximately 33 million eligible options. If all these options are tendered and accepted in the offer, the aggregate cash purchase price for these options would be approximately $92 million," Nvidia said in a statement.

Nvidia is also instituting company-wide salary cuts. "The executives of our company took the largest and most significant cutbacks," said Huang in the earnings conference call on Tuesday. But he added that it affects "almost all of our employees," is "broadbased and it's everywhere."

On Thursday, senior vice president Dan Vivoli, in a phone interview, said that executives "don't get any of their variable this year" which, in some cases, is a large part of their pay. There will be a broader pay cut too. "We decided to do a five percent across-the-board pay cut," Vivoli added.

Analysts don't expect much improvement in the coming quarters. "Growth catalysts include Tegra (ships 2H09), Telsa (ramping) and Ion (shipping), though we do not expect these to meaningfully contribute to revenue and gross margin upside for several quarters out," said Doug Freedman of Broadpoint.AmTech in a research note.

In September Nvidia said it was cutting its workforce 6.5 percent.

Worldwide PC processor shipments fell sharply in the fourth quarter of 2008, though Intel's Atom chip bucked the trend, according to new data from IDC.

In the fourth quarter, processor unit shipments declined 17 percent quarter over quarter and 11.4 percent year over year, while market revenue declined 18 percent over the previous quarter and 22.2 percent compared to the year-earlier period to $6.78 billion, IDC said.

"The decline in PC processor unit shipments in the fourth quarter was the worst sequential decline since IDC started tracking processor shipments in 1996," said Shane Rau, a chip analyst at IDC.

(Credit: IDC)

For the full year, total PC processor unit shipments grew 10 percent, while revenue grew 0.9 percent to $30.8 billion.

Intel's Atom processor is proving to be recession-proof. The popular Netbook chip prevented overall unit decline percentages from going above 20 percent. Without Atom, worldwide PC processor unit shipments would have been significantly worse: declining 21.7 percent quarter over quarter and 21.6 percent year over year, IDC said.

Intel grabbed an 81.9 percent unit market share in the fourth quarter, up 1.1 percentage points over the previous quarter. AMD fell to 17.7 percent, a loss of less than 1 percentage point. For the full year, Intel had an 80.3 percent unit market share, a gain of nearly 3 percentage points, while AMD's share dropped to 19.2 percent, a loss of 3.1 percentage points.

In 2008, Intel gained 4.8 percentage points in mobile PC processor market share, garnering 87.1 percent of the market. AMD finished with a 12.1 percent share of the mobile PC processor market, a loss of 5.3 percentage points.

Looking ahead, IDC said demand remains so weak that it expects sequential processor unit shipment to decline in both the first and second quarters of 2009.

Correction, 2:44 p.m. PST: This story initially misstated the day Nvidia slashed its revenue guidance by up to 50 percent. It was January 13.

Nvidia posted a fourth-quarter loss of just under $148 million and a 60 percent drop in revenue as demand plummeted.

On Tuesday, the largest graphics chip supplier reported a loss of $147.7 million, or 27 cents a share, compared with a profit of $257 million, or 42 cents a share, in the year-earlier period.

The Santa Clara, Calif.-based company posted revenue of $481.1 million, down 60 percent from the $1.2 billion reported for the fourth quarter a year ago.

Excluding special items, the loss would have been $94.4 million, or 18 cents a share. Analysts had expected a loss of 12 cents a share on $587 million revenue.

Shares of Nvidia fell more than 7 percent in after-hours trading.

"November fell off a cliff," said CEO Jen-Hsun Huang, addressing the decrease in demand, during an earnings conference call Tuesday. Chief financial officer Marvin Burkett added that December was worse.

Nvidia had slashed revenue guidance by up to 50 percent back on January 13.

Most of the major PC chip suppliers, including Taiwan Semiconductor Manufacturing Co. (TSMC), have cited a dramatic fall-off in orders from customers. TSMC has said it expects the chip industry to decline by mid to high single digits in 2009, "with very little visibility."

iSuppli, which tracks the PC market, said in its Q4 2008 Market Tracker that shipments of desktop PCs--where most of the high-end, high-profit-margin graphics chips go--are forecast to decline by 6.4 percent in the quarter on a year-over-year basis. And iSuppli expects the desktop PC market to get worse in 2009, with desktop PC shipments falling 5.5 percent to 146.2 million units.

Applied Materials warned Monday of a first-quarter loss. One of the biggest charges cited was doubtful accounts, as customers failed to pay up.

The largest maker of chip production equipment said that it expects a net loss in the range of 9 cents to 11 cents per share for its first fiscal quarter, which ended January 25. It pointed to a restructuring charge of approximately $133 million (or 6 cents per share) associated with a cost reduction program announced on November 12, 2008, as the largest charge. At that time, Applied said it would cut 1,800 jobs, or about 12 percent of its work force.

Applied said this Monday about the steeper losses: "On November 12, 2008, the company provided a target of earnings per diluted share for the first fiscal quarter in the range of $0.00 to $0.04. This target did not include the above charges, which could not be estimated or were not known at that time."

The second-largest charge was $48 million (or 2 cents per share) for "doubtful accounts receivable related to certain customers' deteriorating financial condition," the company said in a statement. Additional inventory charges of $20 million (or 1 cent per share) were due to a decline in demand for semiconductor and display products.

Net sales for the first fiscal quarter are expected to be approximately $1.33 billion, down 35 percent from the fourth quarter of fiscal 2008, and at the low end of the previously provided target range of down 25 percent to 35 percent, Applied said. The company plans to announce and discuss its actual earnings on February 10.

Applied will continue to pursue cost reductions, including shutdowns. "The company intends to continue implementing cost reduction programs, including shutdowns and additional restructuring activities, as appropriate for the unprecedented business conditions."

In related news, global chip sales fell 22 percent in December amid a sharp drop in demand in almost all major chip categories, the Semiconductor Industry Association (SIA) said Monday.

Updated at 4:00 p.m. PST throughout

Texas Instruments posted a sharp drop in profit as it looks to cut 12 percent of its workforce.

TI's fourth-quarter profit fell 86 percent to $107 million, or 8 cents a share, from $756 million in the same period last year, or 54 cents a share. Excluding restructuring charges, TI had earnings of 21 cents a share, exceeding the 12 cents forecast by Wall Street analysts.

Revenue was $2.49 billion, down 30 percent, from $3.56 billion last year. The company also warned that revenue in the first quarter would drop further.

TI, which was ranked the No. 3 chipmaker worldwide in revenue by iSuppli in 2008, said it was cutting 12 percent of its workforce, which includes 1,800 layoffs and 1,600 voluntary departures.

TI's job cuts follow Intel, which said its shuttering of plants would affect more than 5,000 employees, and Advanced Micro Devices, which said it would cut 1,100 jobs.

"We are not counting on a near-term economic rebound for improvement," said Rich Templeton, TI chairman, president and chief executive officer, in a statement.

Charges for workforce reductions will be about $300 million, TI said. Annualized savings from these reductions, plus those announced in October for the restructuring of the company's Wireless business, will be about $700 million after all reductions are complete in the third quarter of 2009, the company said.

Other highlights:

• Orders were $1.86 billion in the fourth quarter, down 47 percent from a year ago
  
• Inventory was reduced by $200 million in the quarter
  
• Capital expenditures were $76 million in the quarter, a decline from $181 million in 2007
  
• For the first quarter of 2009 TI expects revenue of between $1.62 billion and $2.12 billion
  
• For the first quarter of 2009 TI expects EPS of between $0.11 loss and $0.03 profit
  

Updated at 6:15 p.m. PST with AMD statement about a letter it received from Intel on January 20.

Advanced Micro Devices on Thursday reported a bigger-than-expected net loss of $1.4 billion for the fourth quarter of 2008. This is the chipmaker's ninth consecutive quarterly loss.

AMD also disclosed that it received a letter from Intel regarding the two companies' patent cross-licensing agreement.

The $1.42 billion loss, or $2.34 per share, was below the $1.77 billion loss, or $3.06 per share, reported a year ago but worse than Wall Street analysts had expected

Excluding one-time charges, AMD lost 69 cents per share, larger than the loss of 54 cents per share predicted by analysts.

AMD, like Intel and TSMC, has seen a precipitous drop in orders from customers.

Fourth-quarter 2008 revenue came in at $1.162 billion, down 35 percent compared to the third quarter of 2008 and 33 percent compared with the fourth quarter of 2007. Fourth-quarter 2008 revenue was down 28 percent sequentially, excluding third-quarter 2008 process technology license revenue of $191 million, AMD said.

For the year ended December 27, 2008, AMD had revenue of $5.808 billion, while the fiscal 2008 net loss was $3.098 billion. This compares with revenue of $5.858 billion and a net loss of $3.379 billion for fiscal 2007.

AMD provided little future guidance. "In light of the current macroeconomic conditions, very limited visibility and continued corrections in the supply chain, AMD expects first quarter 2009 revenue to decrease from the fourth quarter 2008."

Chief financial officer Bob Rivet said during the earnings conference call Thursday that "factory utilization will be crummy, considering the demand environment." This sentiment echoes what Intel said last week about abysmal factory utilization due to sinking demand from customers. And clear evidence of this trend was provided Wednesday when Intel said it would close five plants.

AMD had warned in December that fourth-quarter revenue would be significantly lower than previously expected.

AMD's stock has been trading around $2 and has lost more than 50 percent of its value since the end of September when the stock was trading above $5.

AMD receives letter from Intel

AMD also disclosed on Thrusday in an 8-K filing with the Securities and Exchange Commission that it received a letter from Intel relating to the patent cross license agreement between the two companies. The agreement covers the x86 instruction set architecture that the companies use in their processors.

An excerpt from the AMD statement in the 8-K filing is as follows: "On January 20, 2009 the Company received a letter from Intel Corporation relating to the 1976 and 2001 Patent Cross License Agreement between the Company and Intel (the 'Cross-Licenses'). In the letter, Intel requests a meeting with the Company to discuss whether The Foundry Company qualifies as a licensed 'Subsidiary' under the Cross-Licenses, whether the creation of The Foundry Company is a breach of the provisions of one of the Cross-Licenses and whether either the transaction establishing The Foundry Company or the Company's 2006 acquisition of ATI constituted a change of control of the Company under the Cross-Licenses."

The Foundry Company is the chip manufacturing operation that AMD is in the process of spinning off.

AMD said it "strongly believes that The Foundry Company qualifies as a 'Subsidiary' under the Cross-Licenses, that the creation of The Foundry Company is not a breach of the provisions of either of the Cross-Licenses and that neither the transaction establishing The Foundry Company nor the Company's acquisition of ATI constituted a change of control of the Company under the Cross-Licenses."

Updated at 11 a.m. PST with additional information from analysts.

These are not ordinary times. Not for Advanced Micro Devices, which reports earnings on Thursday. Nor for Intel.

For starters, AMD said last week that it would slash its workforce by 9 percent and institute temporary salary cuts.

This comes as the company enters the final stages of bifurcating into AMD the product company, which designs chips, and The Foundry Company, which manufactures them. A measure taken to stave off collapse. (There are still a few more steps that have to be taken before the split is sanctioned by all entities involved.)

The Sunnyvale, Calif.-based chipmaker also faces the Herculean task of returning to breaking even in operating income, according to Ashok Kumar, an analyst at investment bank Collins Stewart.

The world economy isn't cooperating, however. AMD, like Intel, has to face a difficult first quarter and possibly troubled second quarter. These two quarters are historically weak to begin with. Add the unusually negative macroeconomic factors on top of that and "recovery isn't looking like a first half kind of thing" for AMD, according to an industry source who follows the company and expects AMD to paint a less than rosy picture.

"This doesn't look like one of your normal semiconductor cycles, where you pop out of it very quickly and very aggressively, and overtake any dips," said the source.

And speaking of dips, Taiwan Semiconductor Manufacturing Co., the largest contract chip manufacturer and major industry bellwether, said on January 9 that December net sales on a consolidated basis were off 30.1 percent from November 2008 and off a whopping 51.9 percent (54.8 percent on an unconsolidated basis) from December 2007. TSMC reports fourth-quarter results on Thursday too.

The situation for Intel--which reported a 90 percent dive in year-to-year fourth-quarter profits last week--isn't that different. Bloomberg is reporting that Chief Executive officer Paul Otellini told employees last week in an internal memo that a first-quarter loss is possible after 87 quarters of profit.

But Intel said as much publicly in its earnings conference call last week, refusing to give official guidance for the first quarter due to heightened uncertainty and then bringing up a possible scenario in which things don't improve as expected.

Chief Financial Officer Stacy Smith put it this way during the conference call: because of the dramatic drop-off in demand from customers (what Intel calls "the supply chain") in the fourth quarter, the chipmaker is "aggressively" reducing factory utilization in the first quarter. "The expectation is that we can start to reload the factories a bit in Q2 from where they are in Q1," he said. But he then addressed a "hypothetical" situation where conditions don't improve as expected.

In this case, Smith said Intel would slow the introduction of next-generation 32-nanometer manufacturing process technology. (Currently Intel chips are based on 45-nanometer technology.) "Over time if our view of demand is wrong and this is much worse than we expect...we'd slow the ramp rate of 32-nanometer," he said.

The question is what measures AMD will take if its already precarious situation gets worse. Doug Freedman of Broadpoint AmTech estimates that AMD's two-quarter sales decline is about 30 percent, though AMD may be faster at correcting excess inventory than Intel.

"We expect the operating income break-even level to be imminently lowered through more permanent cost controls given near-term challenges in the PC-related food chain," Freedman said in a research note Wednesday.

Collins Stewart's Kumar said he thinks AMD may have to further "cost-reduce" itself back to profitability.

Updated at 4:25 p.m. PST throughout, including correction to mobile processor revenue

Intel reported Thursday a 90 percent drop in net income for the fourth quarter, as the company continued to cite an "uncertain" environment.

Revenue met the expectations that Intel set last week when it issued a warning on fourth-quarter revenue. The $8.2 billion in revenue amounts to a 23 percent drop from the year-earlier period, when it reported revenue of $10.7 billion.

Profits plunged 90 percent to $234 million, or 4 cents a share, for the quarter. This is in stark contrast to the same period the previous year, when the world's largest chipmaker posted net income of $2.3 billion on earnings per share of 38 cents.

For 2008, Intel had revenue of $37.6 billion, operating income of $9 billion, net income of $5.3 billion, and earnings per share of 92 cents.

Intel said it is not providing a revenue outlook at this time because of economic uncertainty. But it has an "internal" forecast of about $7 billion in first-quarter revenue.

Intel's earnings report comes just after IDC reported Wednesday that overall PC shipments worldwide dropped 0.4 percent to 77.3 million units during the fourth quarter. There hasn't been an overall drop in shipments since the second quarter of 2001, after the last recession.

IDC also said the growth of the portable-PC market--to date, the hottest PC market--was also down by almost half in the fourth quarter, year to year.

Reflecting these conditions, chief financial officer Stacy Smith said that he saw the "supply chain" (companies that either directly or indirectly order chips from Intel) significantly cutting back in the second half of the fourth quarter and that this contraction could carry over into the first quarter.

In order to control the inventory of chips and avoid oversupply, Intel will bring utilization of factories "dramatically down" in the first quarter, Smith said.

Financial Highlights from the earnings report:

• Fourth-quarter revenue $8.2 billion, down 19 percent sequentially
  
• Gross margin 53 percent, down 6 points sequentially; expected to decline to low 40s in Q1
  
• Operating income $1.5 billion, down 50 percent sequentially
  
• Quarterly net income $234 million; EPS 4 cents, meeting Wall Street forecasts
  

Product Sales Highlights from the earnings report:

• Mobile processor revenue fell to $2.584 billion from $2.989 billion in 2007
  
• Revenue from the Atom Netbook processor was $300 million, up 50 percent
  
• Total microprocessor average selling price (ASP) was flat, but up slightly if Atom is excluded
  
• Processor and chipset units were lower versus third quarter
  

The Atom processor--used most notably in Netbooks--holds much promise but is also a source of angst for Intel. While revenue from Atom shot up, its low price dampened ASPs overall. If Atom is excluded, ASPs would have been up slightly, chief executive Paul Otellini said. Still, he expects "substantial" year-on-year growth for Atom. And the "desirability in entering that segment" expressed by competitors "validates" Intel's view that Atom is an important market, he said.

Otellini was quick to claim that there was "very little cannibalization of notebooks" from Netbooks and said cannibalization is about 10 percent. Cannibalization of its higher-end silicon is a concern for Intel because Atom doesn't deliver the same level of profits.

In 2009, despite the "economic uncertainty"--a term used more than a few times during the earnings conference call--Intel said it will continue to invest aggressively and move quickly to the next generation of processors. "We will not slow down introduction," Otellini said, of next-generation 32-nanometer technology. Smith added that Intel's goal is to get to 32 nanometer "as fast as we possibly can" since moving to a new generation of technology can ultimately boost profitability.

New 32-nanometer chips should appear in the second half of the year, in mobile and desktop initially, Otellini said.

Intel's fourth-quarter warning is not only bad news but bad timing. With the Consumer Electronics Show kicking off Thursday adorned by all those bright, shiny gadgets, Intel effectively said: gadgets maybe, but not so bright and shiny.

And for an Intel warning, this one was particularly dire. The biggest chip bellwether said it now expects only $8.2 billion in revenue for the quarter, a 23 percent drop from the year-earlier period, and 20 percent from the third quarter. And this comes after issuing a warning on November 12.

So what's happening? The clearest example of the gloom that has descended on the chip industry, and by extension computer and gadget makers, came relatively early from another chip bellwether, Taiwan Semiconductor Manufacturing Company -- the largest chip contract manufacturer, which supplies chips to all the first-tier electronics and computer makers. Back on October 30, TSMC issued a forecast that set the tone for the rest of the industry: CEO Rick Tsai said the supply chain -- the myriad of companies that order chips from TSMC -- was "reducing inventory very aggressively."

That supply chain, either directly or indirectly, is the computer and gadget makers of the world.

So going into CES, the picture is not pretty. "We just heard consumer electronics sales over the holidays were down 26 percent year to year," said Broadpoint AmTech analyst Doug Freedman. "You want to head into CES with a pall over it? There it is, right there."

And go the other way, up the supply chain -- the chip gear makers who supply production equipment to chip companies -- and things are even more bleak, with some gear makers saying they don't expect any orders at all in 2009 for certain categories of equipment. In December, Netherlands-based ASML CEO Eric Meurice said that "never before have we witnessed such a sharp and sudden fall-off in lithography system demand."

Other examples are almost too numerous to list: for starters, Toshiba and SanDisk slashing flash memory output 30 percent, Taiwan's memory chip industry on the verge of collapse, and Micron Technology posting a massive $706 million loss.

Yes, there's probably a silver lining in all of this, in that chipmakers and gadget suppliers have to cut the fat and become lean and mean, but where does it end?

And how will this downturn transform the computer industry? Looking at it through the prism of Netbooks -- which are expected to catch much of the limelight at CES -- may provide some insight. These cheap laptop computers are on fire, partially because they are compelling designs but mostly because of price. Good thing? Yeah, great for consumers and small businesses that are finally realizing they don't have to pay $2,000 for a small, lightweight ultraportable notebook. Or simply can't afford a $1,000 notebook.

But not so great for Intel, Apple, and others. "What is the most expensive laptop out there? The Apple (MacBook) Air," said Freedman. "That's a $1,500 or $2,000 machine. Now all of a sudden I'm giving you ultraportability for $500," he said, referring to the price of a Netbook.

In this sense, over-priced notebooks could be seen as roughly equivalent to large SUVs -- overkill. Just as General Motors must wean itself off lumbering SUVs, so may Intel, Hewlett-Packard, Sony, Toshiba, et al., be forced, to some extent, to wean themselves off high-profit notebook computers. After all, what took Sony so long to bring out a Netbook? And why don't we see an Apple Netbook? It's not a stretch to say that those companies don't like the idea of selling a lot of inexpensive computers.

At CES, companies will be hawking flashy gadgets, as always, and maybe attendees can suspend disbelief for a few days blinded by the glare of the gadgets. But that's really just lipstick on a pig.