Disappointing sales, weak demand: Intel, Nokia midquarter reports indicate lack of recovery - Semiconductors

Electronic News, June 17, 2002 by Tom Murphy

Intel's and Nokia's recent midquarter earnings reports underscore a theme that financial analysts have been saying for the last three months: Don't focus on what the semiconductor companies are saying in their financial forecast, focus on what the OEMs are saying.

Intel Corp. lowered its revenue guidance for Q2, citing softer-than-expected demand in Europe. The Santa Clara, Calif.-based chip giant previously expected Q2 revenue to be in the range of $6.4 billion to $7 billion. It now expects revenue to clock in between $6.2 billion and $6.5 billion. The stock has since plummeted to $20.50 during the week following the news.

Nokia last week said that its sales of cell phones will fall in Q2 rather than rise, although Texas Instruments Inc., the largest supplier of cell phone DSPs, reconfirmed a week earlier that orders remained strong through Q2.

Merrill Lynch downgraded Intel from "buy" to "neutral" status two weeks ago, as analyst Joe Osha said the stock valuations for the entire semiconductor sector remained too high while the evidence of a demand recovery for PCs had yet to materialize. In other words, investors had been betting on a recovery in the sector, yet the OEMs buying the chips had little to show in terms of end-demand.

"We downgraded the whole sector," Osha said. "The risk-return was not attractive. The stocks are still expensive in our opinion."

While semiconductor companies showed relative strength in the first part of the year, the orders were more indicative of inventory replenishment after the holidays. For a while, results and guidance looked promising after dismal returns the previous three quarters. That snapback has run its course, and now semiconductor companies have a better taste of reality.

"This is just further evidence that the end-markets still have problems," said Dan Niles, analyst for Lehman Brothers. He also said that while Q2 projections are coming in worse than expected, there are still some concerns with Q3.

While QEMs such as Nokia and Dell are not showing the strength that semiconductor companies had originally predicted, they are also saying higher-performance systems are not selling as well as people thought.

Sales figures by Nokia revealed that the best-selling handsets were those with lower-performance specifications, which may not bode well for TI. The DSP company makes the highest margins from chipsets that enable data services and streaming video, and these chipsets are targeted at the high end of the mobile market.

PC makers are also saying that consumers are preferring systems with the no-frills Celeron processors instead of the high-end 2.53GHz Pentium 4-equipped machines.

Niles said the trends reflect the growing weariness in consumer spending patterns. While consumer spending has remained relatively strong during the downturn, it may be getting to the point where they have to justify their purchases.

"There's no sense in buying a Lamborghini if all you can do is drive it on the highway at 60mph," Niles said.

In that respect, there's no sense in buying a high-end Pentium 4-equipped machine if a 1GHz system plays a video clip just as well.