ChangeWave Research: Semiconductors – Where Do We Go From Here?

ChangeWave Research Report:

Semiconductors – Where Do We Go From Here?

Latest Survey of Alliance Semi Members Shows IndustryHanging In Although There Are Some Signs of a Downturn

Overview

Analysts have turned bearish on Semiconductors over the past few weeks, so we recently went back to our Semiconductor members to find out where things are going for the industry in the 3rd and 4th quarters. A total of 64Alliance members participated in the survey, conducted July 16-22, 2004.Here’s what we found:

Part A:Current Health of the Semiconductor Companies

  • Semi Orders Increasing. Six-in-ten (61%) semiconductor industry respondents report their company has experienced an increase in orders compared to the previous month. Only 12% say their orders have decreased.
  • But theNumber of Cancelled Orders has Decreased.A total of 16% of respondents report a decrease in the number of Cancelled Orders over the past month -- down from 26% in the June 2004 survey.
  • Slightly Fewer Winners than One Month Ago. A total of53% of our semiconductor respondents report their company sales have come in “Above Plan” over the past month. This isa 5-percentage point decrease from the results of our June 2004 Quarterly Sales survey.
  • But Also Slightly Fewer Losers. Only 10% of semiconductor members say their company sales have come in “Below Plan” for the past month – a 2-percentage point improvement from the 12% reported in our June 2004 Survey.
  • Inventories Creeping Up Ever So Slightly.Thepercentage reporting decreased inventories (22%) was down 4-percentage points from the previous month, while the percentage reporting increased inventories remained virtually the same (29%) – with the result being a small +3 pt. creep up in overall inventories.
  • What’s in the Pipeline? Visibility Still Looks OK. In a positive sign,a total of 49% of semiconductor respondentsproject their company will come in “Above Plan” for the 3rd Quarter. While this is a 1-percentage point decrease from our survey of a month ago, the percentage saying their company will come in “Below Plan” (4%) has decreased by 2-percentage points over that same time period.
  • Growing Customer Willingness to Buy Products. Importantly, the percentage of respondents who say their existing customers have a “Green Light” to spend rose 5-percentage points in the current survey, from 68% in June to 73% currently – a healthy sign.

Part B:Rating the Overall Industry

  • Future Growth Slowdown? Forty-eight percent (48%) of respondents believe there will be double-digit growth for the semi industry in the 2nd half, but that’s a significant decrease from a month ago when 78% believed there would be double- digit growth. This finding on the industry’s prospects is more in sync with the bearish market conditions of the past month, and contradicts much of the bullish survey findings in Part A (above).
  • Best Performing Sub-Segments. Flash Memory (Net Difference Score= +32) and Communication Chips for Cell Phones (+27) are seen as the strongest semiconductor sub-segments over the next six months. RFID Chips (+20) – which was the best performing sub-segment in our April 2004 survey – is still doing relatively well but has dropped 10 pts. since our Aprilsurvey.
  • Market Share Gainers. Texas Instruments (Net Difference Score = +25) tops the list of chip vendors respondents believe will gain market share over the next 6 months, but it has lost momentumfrom the previous survey (as measured by a 17-pt. decline in its Net Difference Score – the largest among all chip vendors). Sandisk (+17) and Taiwan Semi (+17) are also seen as strong performers over the next six months.
  • Market Share Losers. PMC Sierra (Net Difference Score = -7) and LSI Logic (-6) are seen as the companies most likely to lose market share.
  • Fab Capacity: Not As Tight. The percentage of respondents reporting “tight” fab capacity (39%) declined 18 pts since our April 2004 survey, while the percentage reporting “firm” fab capacity (45%) increased 20 pts. in that same time period.
  • Marginal Increase in Capital Spending. While 4-in-5 respondents see an increase in capital spending on new fab capacity over the next 12 months, the vast majority (64%) believe the increase will only be marginal.

Bottom Line: The current survey results point to a semiconductor industry that continues to hang in there, despite Wall Street perceptions of a slump due to increased inventories and their resulting pressure on margins. While the survey results do show a small creep-up in inventories, they also show a large increase in orders over the past month. And while there are slightly fewer winning companies than a month ago, visibility still looks OK moving forward (with49% saying they’ll come in “Above Plan” for 3Q).

On the down side, only 48% of respondents believe there will be double-digit growth for the semi industry in the 2nd half of 2004 – a decrease from a month ago when 78% believed there would be double-digit growth. In addition, the percentage of respondents reporting “tight” fab capacity (39%) has declined 18 pts. since our April 2004 survey. Both findings are more reflective of the bearish market conditions of the past month.

The ChangeWave Alliance is a group of 4,600 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

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Table of Contents

Summary of Key Findings...... 4

The Findings...... 5

Part A:Overall Health of the Semiconductor Industry at the Company Level....5

Part B:Semiconductor Industry Trends...... 12

ChangeWave Research Methodology...... 22

About ChangeWave Research...... 23

I. Summary of Key Findings

Introduction

Analysts have turned bearish on Semiconductors over the past few weeks, so we recently decided to go back to our Semiconductor members to find out where things are going for the industry in the 3rd and 4th quarters. A total of 64 Alliance members participated in the survey, conducted July 16-22, 2004.

The report focuses on 2 key areas:

Part A: Current Health of the Semiconductor Companies

Part B: Rating the Overall Industry

II. The Findings

Part A: Current Health of the Semiconductor Companies

Part A of this survey was only for members who work directly within the semi industry.

Semiconductor Industry Respondents (n = 49)

(1) Question Asked:Which statement best characterizes what your company has experienced over the last month (June 15 - July 15) regarding Orders?

Total Number of Orders Increased Compared to Previous Month / 61%
Total Number of Orders Decreased Compared to Previous Month / 12%
Total Number of Orders Same as in Previous Month / 22%
Don't Know / 4%

Semi Orders Increasing. Six-in-ten (61%) semiconductor industry respondents report their company has experienced an increase in orders compared to the previous month. Only 12% say their orders have decreased.

(1A) Question Asked:Have you noticed any change in the number of Cancelled Orders over the last month?

But the Number of Cancelled Orders has Decreased.A total of 16% of respondents report a decrease in the number of Cancelled Orders over the past month -- down from 26% in the June 2004 survey.There was no change in the percentage reporting an increase in cancelled orders (4%) in the current survey compared to June 2004.

(2) Question Asked:And over the last month, how has your company been doing with regard to meeting its sales plan revenue objectives? Have you been coming in above plan, even, or below plan?

Slightly Fewer Winners than One Month Ago. A total of 53% of our semiconductor respondents report their company sales have come in “Above Plan” over the past month. This is a 5-percentage point decrease from the results of our June 2004 Quarterly Sales survey.

But Also Slightly Fewer Losers. Only 10% of semiconductor members say their company sales have come in “Below Plan” for the past month – a 2-percentage point improvement from the 12% reported in our June 2004 Survey.

(3) Question Asked:How would you describe your product inventories over the last month?

Current
Survey
Jul ‘04 / Previous
Survey
Jun ‘04
Inventories Have Increased / 29% / 30%
Inventories Have Decreased / 22% / 26%
Inventories Have Remained the Same / 35% / 34%
Don't Know / 14% / 10%

Inventories Creeping Up Ever So Slightly.Thepercentage reporting decreased inventories (22%) was down 4-percentage points from the previous month, while the percentage reporting increased inventories remained virtually the same (29%) – with the result being a small +3 pt. creep up in overall inventories.

(4) Question Asked:Next, we want a glimpse into your sales pipeline for the remainder of the 3rd quarter (Jul 15-Sep 30) 2004. Do you think you'll come in above plan, even, or below plan?

What’s in the Pipeline? Visibility Still Looks OK. In a positive sign,a total of 49% of semiconductor respondentsproject their company will come in “Above Plan” for the 3rd Quarter. While this is a 1-percentage point decrease from our survey of a month ago, the percentage saying their company will come in “Below Plan” (4%) has decreased by 2-percentage points over that same time period.

(5) Question Asked:What is the most important reason why your sales pipeline looks this way for the remainder of the 3rd Quarter?

Respondents who say they will come in “Above Plan” indicate it is due to healthy consumer growth, greater demand and increased orders. The reasons cited for coming in “Even” include seasonality, nervous markets and a cautious outlook.

Sample of Alliance Member Responses:

a. Above Plan

  • CLA8139 writes, “Increase in orders.”
  • ROB6736 writes, “Good economy.”
  • VIR2071 writes, “Customers want more.”
  • MAR4145 writes, “Good order, running at capacity. Hear that Qualcomm is allocating CDMA ICs, because of capacity constraints.”
  • CBI9651 writes, “Increase in orders for automotive customers.”
  • WTH1202 writes, “We're not limited in getting orders but by factory output. Faster shipment from suppliers allows for more output. Hence we can take in more orders.”
  • REM5670 writes, “Growth in demand for new products.”
  • CTS5820 writes, “Product shortages.”
  • SIM3624 writes, “Market picking up. Order has increased and we don't have enough inventory to supply our distributors.”
  • RUS0368 writes, “Hybrid Car and Auto Industry in China.”
  • GRO3697 writes, “Strategic customers in growth areas.”
  • KDP6740 writes, “Healthy growth in consumer electronics market.”
  • SHU6149 writes, “Things are on allocation these days.”
  • HFC8959 writes, “End customers’ demands remain strong.”
  • KJO9758 writes, “Seasonality of the summer was extreme this Q. Try getting business done in Europe from July to Sept...Too may holiday/vacation weeks. Yes, I'm jealous.”
  • RSO3253 writes, “Increased demand for tools.”
  • WTK2295 writes, “Higher demand.”
  • CA_2935 writes, “Companies starting to replace year 2000 computers.”

b. Even

  • DON6842 writes, “Vacation Period.”
  • MAB7856 writes, “Seasonal slowdown.”
  • MIK2846 writes, “We are in early phases of new product intros and shipments have yet to really ramp.”
  • BLA0579 writes, “Orders increasing again for 3rd and 4th quarters.”
  • WAN8216 writes, “Market nervosity.”
  • DEN7210 writes, “No surprises so far, either positive or negative.”
  • KGI7365 writes, “Things are status quo for the rest of the year. However we see a downturn for 2005 and increased canceled orders.”
  • BEC2885 writes, “Lack of manufacturing capacity to fill new and increased orders. Prices are increasing due to lack of capacity in the silicon wafer industry.”

c. Below Plan

  • NOR1185 writes, “Demand in market softening. 2nd half of 2004 will struggle to meet 1st half's sales.”

(6) Question Asked:With regard to your own company, how are the prices for your products doing in the current marketplace?

*Notethat a total of 65% currently report their company’s prices are holding firm in the marketplace.

Pricing Power. More semiconductor respondents report prices are rising for their products (20%) than falling (12%), but the gap has narrowed somewhat from a month ago.

(7) Question Asked:Finally, how would you describe the current willingness of your existing customers to spend money on your company's products and services? Regarding spending on new or additional products and services, would you say your customers have a "Green Light" (i.e., spending their budget as planned in the context of the current economic climate); a "Yellow Light" (i.e., spending is downsized but not completely stopped); or a "Red Light" (i.e., virtually all spending is on hold)?

Growing Customer Willingness to Buy Products. Importantly, the percentage of respondents who say their existing customers have a “Green Light” to spend rose 5-percentage points in the current survey, from 68% in June to 73% currently – a healthy sign.

Moreover, only 24% said their customers have a “Yellow light” for spending – which is a 4-percentage point decrease from last month’s survey. Another 2% say their customers have a “Red Light” for spending.

Part B: Rating the Overall Industry

Part B of this survey was for members who work directly within the semi industry and/or have knowledge of the industry.

Total Respondents (n = 64)

(8) Question Asked:Do you believe there will be double-digit growth for the semiconductor sector in the 2nd half of 2004?

Current
Survey
Jul ‘04 / Previous
Survey
Apr ‘04 / Previous
Survey
Nov ‘03 / Previous
Survey
Aug ‘03 / Previous
Survey
Jul ‘02
Yes - Double-Digit Growth in 2nd half of 2004 / 48% / 78% / 63% / 28% / 15%
Little Possibility of Double-Digit Growth in 2nd half of 2004 / 47% / 20% / 29% / 52% / 51%
Absolutely No Possibility of Double-Digit Growth in 2nd half of 2004 / 3% / 2% / 2% / 14% / 31%
Don't Know / 2% / 0% / 5% / 6% / 2%

*Note: In the current survey and April ’04 question we are asking about the ‘2nd half of 2004’, whereas in the other previous survey questions we asked about either the 'current quarter' or 'next quarter.'

Future Growth Slowing? Forty-eight percent (48%) of respondents believe there will be double-digit growth for the semi industry in the 2nd half of 2004, but that’s a significant decrease from a month ago when 78% believed there would be double-digit growth. This finding on the industry’s prospects is more in sync with the bearish market conditions of the past month, and contradicts much of the bullish survey findings in

Part A.

(9A) Question Asked:Which of the following semiconductor sub-segments do you think will perform the best over the next six months? (Choose No More Than Two)

Current
Survey
Jul ‘04 / Previous
Survey
Apr ‘04 / Previous
Survey
Nov ‘03
Communications Chips for Cell Phones / 39% / 37% / 42%
Flash Memory / 38% / 30% / 33%
RFID Chips / 25% / 33% / 31%
Analog Chips / 17% / 18% / 11%
Communications Chips for Telecom and Data Networking Gear / 17% / 17% / 13%
Graphics/Video Chips / 16% / 17% / 24%
Logic/Programmable Chips / 9% / 8% / 7%
Memory Chips / 6% / 17% / 7%
Microprocessor Chips / 3% / 5% / 15%

(9B) Question Asked:And which of the following semiconductor sub-segments do you think will perform the worst over the next six months? (Choose No More Than Two)

Current
Survey
Jul ‘04 / Previous
Survey
Apr ‘04 / Previous
Survey
Nov ‘03
Microprocessor Chips / 34% / 33% / 13%
Communications Chips for Telecom and Data Networking Gear / 31% / 20% / 35%
Memory Chips / 20% / 22% / 16%
Graphics/Video Chips / 14% / 18% / 9%
Logic/Programmable Chips / 14% / 10% / 20%
Communications Chips for Cell Phones / 12% / 18% / 15%
Analog Chips / 11% / 18% / 18%
Flash Memory / 6% / 7% / 9%
RFID Chips / 5% / 3% / 9%

Net Difference Score – Current Survey (July ’04)

Perform
Best / Perform
Worst / Net
Difference
Score
Flash Memory / 38% / 6% / +32
Communications Chips for Cell Phones / 39% / 12% / +27
RFID Chips / 25% / 5% / +20
Analog Chips / 17% / 11% / +6
Graphics/Video Chips / 16% / 14% / +2
Logic/Programmable Chips / 9% / 14% / -5
Memory Chips / 6% / 20% / -14
Communications Chips for Telecom and Data Networking Gear / 17% / 31% / -14
Microprocessor Chips / 3% / 34% / -31

Change in Net Difference Score – Current Survey (July ’04) vs. Previous Survey (April ’04)

Current
Survey
Net
Difference
Score
Jul ‘04 / Previous
Survey
Net
Difference
Score
Apr ‘04 / Change
in
Net
Difference
Score
Flash Memory / +32 / +23 / +9
Communications Chips for Cell Phones / +27 / +19 / +8
Analog Chips / +6 / 0 / +6
Graphics/Video Chips / +2 / -1 / +3
Logic/Programmable Chips / -5 / -2 / -3
Microprocessor Chips / -31 / -28 / -3
Memory Chips / -14 / -5 / -9
RFID Chips / +20 / +30 / -10
Communications Chips for Telecom and Data Networking Gear / -14 / -3 / -11

Best Performing Sub-Segments. Flash Memory (Net Difference Score = +32) and Communication Chips for Cell Phones (+27) are seen as the strongest semiconductor sub-segments over the next six months. RFID Chips (+20) – which was the best performing sub-segment in our April 2004 survey – is still doing relatively well but has dropped 10 pts. since our April survey.

Worst Performing Sub-Segments.Microprocessor Chips (Net Difference Score = -31)once again looks to be the weakest performing sub-segment over the next six months. Communications Chips for Telecom and Data Networking Gear (-14) and Memory Chips (-14) also appear to have weaker prospects over the next six months.

(10A) Question Asked:Let's focus on the chip companies themselves. Based on your own knowledge and what you are seeing in the industry, which of the following chip vendors are most likely to pick-up market share over the next six months? (Check All That Apply)

Current
Survey
Jul ‘04 / Previous
Survey
Apr ‘04 / Previous
Survey
Nov ‘03
Texas Instruments / 31% / 50% / 45%
Sandisk / 23% / 18% / 29%
Xilinx / 22% / 17% / 16%
Intel / 20% / 23% / 40%
Broadcom / 19% / 15% / 11%
Taiwan Semi / 19% / NA / NA
AMD / 17% / 15% / 15%
Analog Devices / 14% / 22% / 15%
National Semiconductor / 14% / 15% / 11%
ATI Technologies / 11% / 5% / 15%
Maxim Integrated Circuits / 11% / 12% / 13%
Silicon Images / 11% / 22% / NA
Cirrus Logic / 11% / 0% / 7%
Linear Technology / 11% / NA / NA
Applied Micro / 9% / NA / NA
Micron / 8% / NA / NA
Zoran / 8% / 13% / 22%
LSI Logic / 6% / 7% / 7%
Altera / 6% / 8% / 11%
Nvidia / 5% / 15% / 16%
United Micro / 5% / NA / NA
Pixelworks / 3% / 5% / 0%
ST Micro / 3% / 12% / NA
Genesis Microchip / 3% / 7% / 9%
ESS Technology / 2% / NA / NA
Intersil / 2% / 5% / 4%
PMC-Sierra / 2% / NA / NA
Vitesse Semiconductor / 2% / 2% / 0%
Other / 6% / 10% / NA

(10B) Question Asked:And which of the following chip vendors are most likely to lose market share over the next six months? (Check All That Apply)