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Strong Q1 seen for chipmakers

Despite the usual downturn in first-quarter semiconductor earnings, analysts say that this year the sector will hold steady.

Despite the usual downturn in first-quarter semiconductor earnings, analysts say that this year the sector will hold steady.

"The industry is going to have a reasonably good quarter...The industry is growing again after collapsing in July of last year," said Montgomery Securities analyst Jonathan Joseph.

Other analysts agree this quarter marks another step in improvement since the 1996 fallout.

"This quarter will be just another step along that improvement as inventories, OEMs, and distribution channels start to rebuild up to normal levels after being deflated in 1996," said UBS Securities analyst Charles Boucher.

Earlier this week, market researcher Dataquest said it predicts the semiconductor market will generate $19.6 billion in 1997, a 27 percent jump over 1996.

Boucher said that growth of 27 percent is not inconsistent with PC market growth of 16 to 17 percent as users upgrade their machines and others migrate toward faster processors with bigger price tags.

And after the seasonal depression that the PC market suffers from during the first quarter passes, spending will increase.

In the later part of the year, analysts expect a strong rebound as companies ramp up on upgrades and move toward more expensive machines. That means that any cuts from price wars may be offset as unit shipments increase.

Intel (INTC), which is probably least affected by seasonal downturns because its reach stretches beyond processors to include video communications, networking, multimedia, and development tools, is expected to report $2.06 a share for its first quarter on April 14, according to First Call. This follows Intel's net profits of $1.9 billion last quarter, or $2.13 a share, beating estimates by a whopping 29 cents per share.

Intel's expects its research and development, manufacturing, and administrative costs to range from four to five percent higher in the first quarter than in the fourth, pulling on profits, said CFO Andy Bryant in an earlier interview.

Intel will launch its new platform, the Pentium II, next month, and those motherboards will provide the world's largest chip manufacturer with additional revenue. "That will contribute to fairly strong top line growth--Intel is going to have a great year," said Boucher.

Chipmaker Q1 earnings estimates
Company
(ticker)
Report date Expected earnings
per share
Advanced
Micro Devices
(AMD)
April 7 -3 cents
Motorola
(MOT)
April 7 45 cents
Intel
(INTC)
April 14 $2.06
Texas Instruments
(TXN)
April 15 57 cents
Cyrix
(CYRX)
April 16 10 cents
Source: First Call

Increased competition for Intel due to Advanced Micro Devices' (AMD) release of its next-generation K6 processor, the company's first MMX-capable chip this week, may prompt Intel to cut prices. Any price cuts and their impact on revenues, however, won't show up until the June quarter, said Boucher.

Dataquest expects smaller chipmakers, such as AMD and Cyrix (CYRX), to see their market share soar this year as well.

AMD is expected to report a loss for its first quarter of 3 cents a share on April 7. If the company achieves the Wall Street estimated loss, it is one step closer to recovery.

The chipmaker announced a smaller-than-expected fourth-quarter loss of 15 cents a share thanks to accelerated shipments of AMD's K5 microprocessors. AMD started to pull out of a slump last November when the company started limited shipments of its K6 processor.

But some analyst wonder if AMD has what it takes to successfully compete with the largest chipmaker.

"AMD will not take away market share from Intel because the industry still has a lack of confidence in AMD's ability to bring upgrades," said Boucher.

Cyrix, another company that is trying to shave away slivers of Intel's market, will report its first-quarter earnings on April 16. Wall Street is expecting 10 cents a share. Last quarter, the company posted a loss of 23 cents per share.

"Similar to the fourth quarter, the number of negative earnings preannouncements has been relatively limited, and we expect the majority of semiconductor companies to report earnings that meet or slightly exceed consensus estimates. We believe firmer DRAM prices and low inventories at OEMs and distributors...suggest that near-term visibility has improved," a Prudential Securities report said this week.

There will be extremely strong demand for those companies that are more broadly exposed to all markets, such as LSI Logic, Altera, Xilinx, and Texas Instruments, said Boucher.

On Wall Street, the chipmakers were gaining ground today: AMD was up over 3.5 percent; Cyrix and LSI Logic were up over four percent; Texas Instruments was up about 4 percent; and Intel gained over 2 percent.

The worldwide chip market, meanwhile, is expected to grow at a 15 to 16 percent rate this year. Analysts said there is no reason that it will slow over the next couple of years.

"Networking is still growing with strong demand as companies expand telecommunications networks and upgrade equipment. After telecom deregulation last year, it is just starting to grow now [and there is a lot of room for continued growth]," said Boucher.

There also will be strong demand for electronic systems and a strong demand for telecommuting and networking products. The continued growth in those areas will positively impact the semiconductor industry, as chips serve as the lifeblood of a wide variety of products.