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Semiconductor Q3 Preview: Results Seen at Low End of Guidance

 October 11, 2012 10:33 AM

(By Mani) Semiconductor companies are expected to give a repeat of the second quarter results as macro-economic concerns continue to mute growth and recovery in the sector. As a result, several firms are likely to report their third-quarter results at the low end of their guidance ranges.

The commentary out of Intel Corp. (NASDAQ: INTC) and Texas Instruments (NASDAQ: TXN) revealed the true impact of a weaker-than-expected macro conditions. The present semiconductor cycle has not played-out as expected with only one quarter of slightly better-than-seasonal demand for the broad-based suppliers.

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

Chip giant Intel, which reports on Oct.16, now sees third-quarter revenue of $13.2 billion, plus or minus $300 million, compared with previous expectations of $13.8 billion to $14.8 billion. Wall Street currently forecasts Intel to earn 50 cents a share on revenue of $13.2 billion, according to analysts polled by Thomson Reuters.

Relative to the prior forecast, the company is seeing customers reducing inventory in the supply chain versus normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand. The data center business is meeting expectations.

Texas Instruments, which reports on Oct.22, also narrowed its expected ranges for third-quarter revenue and earnings per share (EPS). The company currently expects revenue of $3.27 billion to $3.41 billion, compared with the prior range of $3.21 billion to $3.47 billion. EPS is estimated at 38 to 42 cents, versus earlier range of 34 to 42 cents. Analysts currently expect earnings of 46 cents a share on revenue of $3.34 billion.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

"We believe the magnitude of these revisions will be relatively incremental as aggregate semi EPS estimates are already down 12 percent year-over-year and down 20 percent from the prior cycle peak (June 2011)," Deutsche Bank analyst Ross Seymore wrote in a note to clients.

This aggregate reduction reflects the supply-driven correction seen in the second half of 2011 followed by a macro-induced holding pattern as evidenced by consensus next twelve-month EPS estimates remaining flat for an unprecedented 8 months.

"Despite current consensus estimates for the top 50 U.S. semi companies already reflecting sub-seasonal revenue growth of 1 percent quarter-over-quarter vs. the 5 percent historical average, we expect additional incremental downside when companies report results," Seymore noted.

From an end market perspective, nearly all segments would be impacted by the overall weaker macro environment, barring the automotive segment and select handset areas such as suppliers of Apple Inc. (NASDAQ: AAPL) and Samsung. In addition, softness could be experienced in the PC, industrial and communication infrastructure markets.

Meanwhile, channel inventory should decline slightly in the third quarter as revenue growth estimates for the top 50 semi companies are slightly below their customers. For the second quarter, semiconductor days inventory outstanding (DIOs) were at 89 days.

"This dynamic is likely to leave semi DIOs relatively unchanged in 3Q '12, but we expect this metric to likely decline in 4Q as revenue growth resumes," Seymore said.

Meanwhile, soft macro trends are likely to persist in the fourth quarter as the sector would still grow revenues and EPS sequentially, albeit at a slower pace. As a result, the companies may give a muted outlook for the October to December period.

"In aggregate, for companies under coverage, we expect 4Q revenue to be up 2 percent quarter-over-quarter, below the Street consensus of 3 percent quarter-over-quarter. On an EPS basis, we forecast a 1 percent quarter-over-quarter rise, below the Street's 6 percent increase," the analyst said.

The additional inventory burn in the fourth quarter, primarily driven by Intel and Qualcomm Inc. (NASDAQ: QCOM) brings absolute channel inventory to nearly the same trough seen in the fourth quarter of 2010 and 2011, a level off from which solid restocking has typically followed. This trend should bode well for the first half of 2013.

"Our favorite names remain Buy-rated INTC in mega-cap, BRCM in large-cap, AVGO in mid-cap, as well as FCS, MPWR, POWI and SIMO in small-cap," Seymore added.



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