Nanotech - The Circuits Blog

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.

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.

Updated at 2:50 p.m. with correction of comments in FORM 10-Q

Intel reiterated in an SEC filing Friday that business conditions may worsen and that demand for its chips may take a hit because of global economic conditions.

As a result of the recent financial crisis, "there could be a number of follow-on effects from the credit crisis on Intel's business, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies," Intel restated in a FORM 10-Q filing.

Intel also cited "increased expense or inability to obtain short-term financing of Intel's operations from the issuance of commercial paper."

"The current uncertainty in global economic conditions makes it particularly difficult to predict product demand," Intel said, reiterating what was stated in its third-quarter earnings announcement.

(Intel also plans to publish a mid-quarter business update on December 4, 2008.)

For the fourth quarter of 2008, Intel reiterated that it expects revenue of between $10.1 billion and $10.9 billion and a gross margin of 59 percent, plus or minus a couple points. Gross margin is a crucial indicator of profitability. The company repeated that economic uncertainty may result in lower than expected demand and may "negatively impact our gross margin if we fail to reduce manufacturing output accordingly."

Restructuring and asset impairment charges--as stated in its third-quarter earnings announcement--will be approximately $250 million, which includes charges related to Intel's joint decision with Micron to discontinue the supply of NAND flash memory from a facility within the Intel-Micron manufacturing network.

iSuppli warns on flash memory revenue
And speaking of NAND flash memory, iSuppli said Friday that its revised forecast for the flash memory market predicts that worldwide NAND flash memory revenue will fall by 14 percent to the $12 billion level in 2008, down from $13.9 billion in 2007.

This year will mark the first time that worldwide NAND flash revenue has declined on an annual basis.

In 2009, global NAND flash memory revenue will decline by another 15 percent, iSuppli said.

More dire forecasts for the chip industry.

On the heels of comments from a chip industry watchdog group last week saying the chip equipment business is "on hold," Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chip manufacturer, said PC-related chip shipments are expected to be off 20 percent in the fourth quarter.

This bodes ill for PC makers, which appear to be cutting way back on chip orders.

"(For) our fourth quarter computer-related wafer shipments...we expect to see over a 20 percent decline. Which is very severe...compared to a seasonal mid-teens percentage growth," said CEO Rick Tsai on Thursday, speaking during the company's earnings announcement.

TSMC is considered an industry bellwether because it makes graphics chips for both Advanced Micro Devices and Nvidia and manufactures a variety of chips that go into cell phones and consumer electronics devices as well as other chips for PCs.

The "supply chain"--the myriad of companies that order chips from TSMC--is "reducing inventory very aggressively," he said.

Because of the state of the world's financial markets, "most our customers are aggressively paring their inventories and have thus reduced significantly their wafer demand," said Lora Ho, VP and chief financial officer of TSMC.

"We believe the foundry sector will likely underperform the overall semiconductor industry in 2009," he said. Foundry refers to a contract chip manufacturer. "In 2009, we now expect the semiconductor industry to decline by mid-to high single digit in 2009. With very little visibility."

TSMC reported a net profit of NT$30.574 billion ($930 million) in the July-September quarter, the company said Thursday. That was slightly higher than NT$30.4 billion reported a year ago.

Chartered Semiconductor, another large contract chip manufacturer, also said on Thursday that it "started to see orders declining from the middle of August, followed by some customer requests to reschedule deliveries forward. The weakness is expected to deepen into the fourth quarter."

The prepared comments continued: "Based on current outlook, we are guiding for Chartered revenues to be down approximately 21 percent sequentially...in the fourth quarter. In line with the demand outlook, we are also reducing our capital expenditure for 2008 to $650 million, which is $100 million lower than the amount we had earlier anticipated."

The chip equipment business is "on hold," said an analyst at a major industry association, and that bodes ill for the electronics industry in 2009.

Chip equipment makers signal how the electronics industry will fare in the future. They take orders from chipmakers which, in turn, take orders from electronic gadget makers.

Lara Chamness, a senior market analyst in industry research and statistics at Semiconductor Equipment and Materials International, talked about prospects for the industry in an interview. SEMI is an industry watchdog that covers the manufacturing supply chains for the microelectronic, display, and photovoltaic industries.

"We were hoping that 2009 would be the comeback year for semiconductor equipment. Now our outlook is much more cloudy," Chamness said.

On October 16, SEMI issued a report saying that the book-to-bill ratio for North American semiconductor equipment manufacturers slipped to 0.76 in September, the lowest ratio since November 2001. A lower ratio indicates lower orders.

While Chamness said the economic crisis is affecting everyone, the chip equipment industry is facing a double whammy of downturn and glut. Above and beyond the financial crisis, the overcapacity in memory has been affecting the bottom line of just about every major chipmaker, including Intel, SanDisk, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology.

"Things have been really difficult for the memory guys in the last few years...They're focusing on cleaning up their own operations and not expanding," Chamness said.

Then there is the worldwide financial problem on top of this. "Capital markets are freezing. So that's directly impacting capital equipment. It's indicative of what's happening in the worldwide economy," she said. "The addition of fab capacity is on hold right now. People are being very conservative with their money."

She cited TSMC, the largest contract chipmaker in the world, as an example of a company where factory utilization rates are low. "TSMC has announced a pretty significant drop-off as far as utilization goes."

Lam Research said chip plant utilization rates are at low levels.

(Credit: Lam Research)

Lam Research, a major chip equipment supplier, said its outlook is darkening too. "Our customers are facing an environment of reduced IC (integrated circuit) unit demand combined with already-existing excess capacity," said Steve Newberry, Lam's president and chief executive officer, speaking during the company's earnings conference call earlier this week.

"The unprecedented events in the world's financial markets have severely restricted access to investment capital not only for our customers but many of their customers," he said. "Supply and demand imbalance in semiconductors, especially memory, appears to have worsened over the past few weeks."

SEMI's Chamness holds out hope for the U.S. government's stimulus package. "In a few months, if the (U.S. government's) stimulus package works maybe they'll feel more comfortable and they'll start reinvesting."

Intel, she said, is one of the few investment standouts. "Intel is actually investing right now. They traditionally invest when times are hard." (It should be noted, however, that Intel--as part its joint manufacturing venture with Micron Technology--has scaled back its manufacturing capacity for flash memory.)

Along with the economy, chip forecasts are heading south.

Following an outlook about weak chip industry capital spending from market researcher Gartner on Wednesday, iSuppli cut its 2008 IC revenue forecast to 3.5 percent from 4 percent on Thursday.

The memory chip industry is the canary in the coal mine. At least two memory chip manufacturers are on life support right now. Hynix, the world's second largest maker of memory, is trying to scare up cash by seeking buyers for a 36 percent stake in the company. The other ailing memory maker is Qimonda AG. Rumors have been rife that the manufacturing assets of the loss-ridden company will be snapped up.

Hynix and Qimonda won't get any help from the market in the coming months. Gartner said that the oversupply in memory, combined with a slowing consumer market, "gives little hope for an upside until 2010." Semiconductor industry capital spending is forecast to decline 25.7 percent in 2008--this would be the steepest decline since 2002--and another 12.8 percent in 2009, according to the market researcher.

The iSuppli report isn't any brighter. The outlook for memory revenue has been revised downward by 5.8 percentage points for 2008. iSuppli is citing the "credit crisis" as adversely affecting demand.

And let's not forget the Micron surprise on Thursday. The largest maker of memory chips in the U.S. said it would reduce its workforce 15 percent during the next two years. "Selling prices for NAND flash memory (are) significantly below manufacturing costs," Micron said in a statement.

SanDisk--the largest supplier of retail flash memory products--has problems of its own. It has become a buyout target as its stock price has steadily declined over the last 12 months.

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