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Is the worst over for chipmakers?

Analog Devices is only the latest in a long line of chipmakers to warn about slumping sales and increasing competition.

When Analog Devices said its microprocessor sales would take a downturn during the quarter ending August 1, the company became only the latest in a long line of chipmakers to warn about slumping sales and increasing competition.

The integrated circuit company said that it expects sales to fall by about 10 percent due in part to sluggish sales in Asia. It warned also that its fiscal third-quarter earnings, expected to be released next month, will be impacted significantly.

The semiconductor industry has been hit hard this year by the Asian financial crisis, as well as by PC price wars that have cut into foreign sales, requiring chipmakers to reduce prices on semiconductors and other components.

Applied Materials, the world's largest supplier of wafer fabrication equipment, warned this month that its third-quarter earnings would fall below Wall Street's expectations. The company also has announced layoffs, joining Intel and National Semiconductor in doing so during recent months.

Following less-than-stellar quarters from Motorola and Intel, the Analog Devices warning leaves some analysts wondering if the worst is over for chipmakers, a highly competitive group.

Most remain hopeful that the industry will emerge from its doldrums by year's end or early next year.

"The third calendar quarter will be the bottom for the semiconductor industry," said an optimistic David Wu, an analyst with ABN AMRO. "July, August, and September should be the low point."

Others predicted a tougher road ahead. "I think it's premature to say that the worst is known," said Ron Bohn, director of research operations for Dataquest. "It's something that we're monitoring month-to-month."

Bohn said that it is difficult to forecast when the semiconductor industry will rebound because different Asian countries affect the market segment in unique ways.

"The magnitude of the impact on semiconductors in Korea is known," he said, "but we may not know that Indonesia had a large impact for months."

Wu pointed out that, in addition to concerns about Asia, summer typically is the worst season for computer chip sales. "If you didn't think the second quarter was bad, wait until the summer, when people are on vacation," he said, predicting stronger sales figures during the fourth calendar quarter and the holiday season.

"If [sales] don't pick up by then, we're in a recession," he said. "The U.S. consumer is flush with money, and if they're not buying, then something is wrong."

Revenue growth in the semiconductor industry has been flat for nearly five years, but the Asia crisis has exacerbated the problem, said Ashok Kumar, a technology analyst with investment firm Piper Jaffray.

"The unit growth is about 10 percent a year, but [average selling prices] have declined about 18 percent, which means, in dollar terms, the semiconductor industry is losing about 10 percent a year," Kumar said.

He noted also that, while semiconductor manufacturers and PC makers continue to expand sales--even in a mature market such as North America--overall consumer demand hasn't kept pace with the advancing technology in high-end chips that has led to lower prices.

"The prices are falling because there is a lack of muscle applications that require a Pentium II running at 400 MHz," he said. "I mean how fast do you want to run your spell check or your screen saver?"

C.B. Lee, a technology analyst with investment banking firm Sutro & Company, said falling prices also are being driven by increasing demand for the sub-$1,000 PC.

Kumar said the Asian woes have had the worst impact on the wireless sector, for chips that power communications devices such as mobile handset phones. There was a large growth forecast in the wireless chip market late last year, he said, adding, "but that's a complete disaster now."

Sutro's Lee said the Asian financial slump took longer to hit analog chipmakers because of the so-called trickle down effect through the supply chain.

Stock in Analog Devices ended the day down more than 12 percent, at 23.625.

Meanwhile, shares in other semiconductor players, including Intel, Rambus, Cirrus Logic, LSI Logic, Micron Technology, and Cypress Semiconductor were down today, but not as sharply as Analog Devices.

Today's trading was not all bad news for the semiconductor sector, however, as shares in National Semiconductor and Advanced Micro Devices rose slightly.

AMD shares were up nearly 5 percent, closing the day at 17.375 after the company announced a deal with Motorola to collaborate on high-speed copper chips.