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US Chip Companies Expected To Meet First-Quarter Views

By DONNA FUSCALDO

Of DOW JONES NEWSWIRES
NEW YORK -- Despite the war in Iraq and the spread of severe acute respiratory syndrome, or SARS, in Asia, most U.S. chip makers are expected to meet analysts' earnings and sales estimates when they report first-quarter results later this month.

Although worries abounded in the beginning of the quarter that chip makers would be stuck with excess inventory, those fears were alleviated when companies started to stock up on semiconductors in an effort to prevent problems if the war interrupted shipments.

Still, the flurry of buying, which will help chip companies meet expectations in their seasonally slow first quarter, could make things worse in the second quarter.

"There was a lot of stocking by distributors, but end demand for the products the chips go into, whether it's storage, cell phones, PCs or networking gear, wasn't that good in the March quarter," said Daniel Niles, an analyst at Lehman Brothers Inc. As a result, "you'll see most semiconductor companies reporting a good March quarter but having trouble with their guidance."

Analysts are bracing for cautious forecasts. Last month, Joseph Osha, an analyst at Merrill Lynch & Co., regarded his sales growth estimate for the second quarter as conservative. Now, he thinks he may have been too optimistic. Osha was predicting sales would increase 3% to 4% in the second quarter from the first quarter.

Industry watchers note the second quarter is usually the toughest period for chip makers. They say the war in Iraq and the spread of SARS could create more uncertainty. SARS would affect chip companies since a lot of the manufacturing takes place in Asia.

No Surprises Expected From Intel
While Intel Corp. (INTC) is expected to meet the Thomson First Call estimate for the first quarter of earnings of 12 cents a share on $6.7 billion in sales, analysts say Intel will be guarded about the second quarter.

"We believe June quarter revenues guidance is likely to be down 2% to 3% versus current consensus expectations of down 0.6%," Lehman's Niles wrote in a recent report.

The analyst did note that some of the weakness could be offset by Intel's ability to sell more expensive, higher-margin laptop and server chips.

In the first quarter a year ago, Intel earned 15 cents a share on $6.8 billion in sales.

Niles does not own shares of Intel, but Lehman does have an investment banking relationship with the company.

In the case of Advanced Micro Devices Inc. (AMD), analysts expect the company will meet targets for the first quarter, in part because it may have picked up flash memory chip business from Intel.

In its mid-quarter update early last month, Intel said that while sales of computer chips appear to be coming in a bit better than expectations, a price increase in flash memory dampened sales.

In January, Intel raised its flash memory chip prices by 20% to 40%, expecting an increase in demand. As a result of the price hikes, companies turned to other sources for their memory chips, which could bode well for AMD.

"All things considered they (AMD) probably should do OK in the first quarter and might pick up flash (business) from Intel," said Dan Scovel, a Needham & Co. analyst, who doesn't own shares of AMD.

Scovel expects AMD will report a loss of 38 cents a share on $691 million in sales for the first quarter, much better than the consensus estimate of a loss of 49 cents a share on $680.7 million in sales. What AMD will say about the second quarter is up for grabs, Scovel said.

"They've been pounding the table for six to nine months that they will be close to break-even in the second quarter," said Scovel. But the biggest issue for AMD is reducing expenses, he said.

In the year-ago first quarter, AMD lost 3 cents a share on $902 million in sales. Needham doesn't have an investment banking relationship with AMD.

As for Texas Instruments Inc. (TXN), most Wall Street watchers expect the Dallas chip maker will meet its targets, especially since the company reconfirmed its outlook in mid-March. The average earnings estimate of analysts, according to First Call, is 6 cents a share on $2.14 billion in sales. In the year-ago first quarter, Texas Instruments earned a penny a share on $1.83 billion in sales.

Looking ahead, Clark Fuhs and Daniel Amir, analysts at Fulcrum Global Partners, both whom do not own shares of Texas Instruments, said the June quarter is seasonally strong for the chip maker's calculators and sensors and controls businesses, which could contribute three to five percentage points of revenue growth in the quarter.

Overall, the two analysts expect Texas Instruments to say it expects sales will increase 4% to 5% in the second quarter from the first quarter.

Fulcrum does not have an investment banking relationship with the company.

Modest Improvements Expected From Equipment Makers
Chip equipment makers are also expected to have little surprises when they report quarterly earnings. But some analysts expect their outlooks to show modest improvements.

Ali Irani, an analyst at CIBC World Markets Corp., expects chip equipment companies will post a 2% to 3% increase in sales for the first quarter. He also expects the companies to say they will see even more improvement in the second quarter.

Still, while a 2% to 3% increase in sales is only a modest uptick, it is better than the 30% decline in revenue seen in both 2001 and 2002. Irani said chip equipment makers will see improvements in seasonal volume as well as a migration by chip makers to more advanced process technology.

Irani expects that Applied Materials Inc. (AMAT), one of the world's largest chip equipment makers, will meet his fiscal second-quarter targets of earnings of 2 cents a share and $1.05 billion in sales. That's the same as the First Call consensus estimate. In the year-ago period, Applied Materials weighed in with earnings of 3 cents a share on $1.15 billion in sales.

Irani, who doesn't own shares of Applied Materials, noted that the company's recent restructuring plan will lower its break-even point by $100 million. CIBC doesn't have an investment banking relationship with Applied Materials.

-By Donna Fuscaldo, Dow Jones Newswires; 201-938-5253; [e-mail]

Updated April 10, 2003 10:14 a.m.



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