Semiconductor Inventory Situation
After yesterday’s Agere (AGR) preannouncement, we decided to update our research on semiconductor industry fundamentals. This has been made easier since we received a complimentary trial of Zacks Research Wizard.
We first note that days inventory on hand at 39 semiconductor companies listed on public markets in the U.S. improved slightly in the December quarter. This improvement is in line with normal seasonality, as the holiday season is typically marked by strong sales of consumer electronics and the inventory moves away from the manufacturer toward the end user. On a year/year basis to more accurately reflect the seasonality, the days inventory on hand rose.
What the chart doesn’t show is what happened to inventory in the channel. For the uninitiated, the “channel” is everything between manufacturer and end user. For semiconductors, the channel includes distributors, the manufacturers that put the chips into end products such as cel phones or computers, and distributors, wholesalers and retailers of the end products. Given the increasing evidence of slowing consumer demand, the channel inventory could be particularly significant right now (remember Agere’s warning was due to channel inventory corrections.)
Next we turn to capacity utilization, which has clearly started to fall. Excess capacity means the potential for even more inventory to be produced, which tends to put downward pressure on prices. Since the majority of semiconductor manufacturing costs are fixed, low utilization means lower profits - either because prices have to be reduced or because the per-unit costs are higher when production is cut.
Next we turn to orders for new semiconductor equipment, which when installed will increase capacity still further (thus lowering utilization still further.) The new equipment orders continue to rise at a much faster rate than the end demand for semiconductors.
So there you have it - on an industry-wide basis things are bad and appear likely to get worse. We’ll finish things off with a list of the companies whose days inventory grew year/year:
Disclosure: William Trent has a long position in SMH.
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[…] We followed up last week, saying “Next we turn to capacity utilization, which has clearly started to fall. Excess capacity means the potential for even more inventory to be produced, which tends to put downward pressure on prices. Since the majority of semiconductor manufacturing costs are fixed, low utilization means lower profits - either because prices have to be reduced or because the per-unit costs are higher when production is cut.” It sounds very similar to what Scalise described in today’s SIA press release: “Year-on-year, we see evidence of the fiercely competitive market conditions – across the board unit sales in key products increased, while ASPs declined. Unit sales of microprocessors were up almost 8 percent while ASPs declined 15 percent, and NAND flash units grew by over 40 percent while experiencing a nearly 50 percent drop in ASPs. These products tend to be indicators of conditions in important end markets such as personal computers and consumer devices,” Scalise continued. “Personal computers and consumer products now account for approximately 60 percent of semiconductor sales. Both competitive conditions and product mix issues appear to be affecting revenues of these key components.” […]