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Semiconductors

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    Semiconductors Semiconductors Document Transcript

    • North America Equity Research 08 October 2010 Semiconductors 3Q10 Earnings Preview: Buckle Your Seatbelt Because We're Going for a Ride During 3Q10 earnings season we expect almost every semiconductor company U.S. Semiconductor Devices that sells into the PC and consumer end markets to lower guidance for 4Q10 while AC Christopher Danely companies selling into the communications and industrial end markets offer only (1-415) 315-6774 seasonal guidance. After bouncing roughly 14% during September, we expect the chris.b.danely@jpmorgan.com SOX index to decline during October due to the high levels of inventory on J.P. Morgan Securities Inc. semiconductor company balance sheets. Venk Nathamuni • Here comes phase 1 of the downturn . . . As we outlined in our September 5 (1-415) 315-6783 note, “Handbook on How to Navigate the Downturn and When to Buy Semis,” venkatesh.r.nathamuni@jpmorgan.com we expect many semiconductor companies to begin to lower guidance during J.P. Morgan Securities Inc. October due to the inventory correction. Shaon Baqui • . . . and it's gonna get much worse—here comes ballooning inventory. We (1-415) 315-6766 shaon.i.baqui@jpmchase.com expect 4Q10 to be the “quarter of capitulation” as semiconductor capacity is ramping faster than demand, and we expect inventory at semiconductor J.P. Morgan Securities LLC companies to rise to 82 days, the highest since 4Q08. We expect semiconductor companies to capitulate and lower utilization rates over the next few months as it becomes obvious that production rates and inventory are too high. As a result, we expect large reductions in gross and operating margins, which lead to the typical 30% reduction in consensus estimates. • PC demand stable but well below normal. Although semiconductor stocks have bounced due to stable orders from the PC end market, we note that the stability is at much lower than seasonal levels, which implies further downside to consensus estimates. Our J.P. Morgan notebook ODM analyst, Alvin Kwock, expects a 5% QoQ unit increase in 4Q10, well below normal seasonality of up 19%. As a result, we expect both Intel and AMD to provide sub-seasonal 4Q10 guidance with ballooning inventory. • Consumer end market wobbly. Our checks also indicate demand from the consumer end market remains tepid, and we expect Texas Instruments to guide 4Q10 revenue down sequentially with a concomitant increase in inventory. • Next meltdown coming in Comm and Industrial. We expect the weakness to spread to the wireless, communications, and industrial end markets over the next few months, which is typical of a downturn. We note that National Semi recently lowered estimates due to weakness in the industrial and wireless end markets. • Hide in the igloo—Linear Technology. Our top relative pick in semis continues to be Linear Technology due to its history of outperformance during downturns and its exposure to the Apple food chain, which appears to be the only bright spot for technology demand. Please see our July 6 note, “Upgrading Linear to Overweight, The Igloo in a Semiconductor Deep Freeze." • When do we fire up the mini-van? We believe the best time to buy semiconductor stocks is after the second stage of the downturn, when the bulk of the earnings revisions are over, because the defensive stance sets in motion a fundamental bottom. We expect this to happen sometime during 1Q11. See page 16 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Semi Weakness Spreading—Expect Downside to Estimates During 3Q10 earnings season, we expect almost every semiconductor company that sells into the PC and consumer end markets to lower guidance for 4Q10 while companies selling in to the communications and industrial end markets offer only seasonal guidance. After bouncing roughly 14% during September, we expect the SOX index to decline during October due to the high levels of inventory on semiconductor company balance sheets. Our 4Q10 and 2011 Estimates Are Well Below Consensus As the table below indicates, our 4Q10 EPS estimates are roughly 18% below consensus as we believe many semiconductor companies will guide 4Q10 below consensus, resulting in further downside to estimates. Our 2011 EPS estimates are also 18% below consensus as we expect the weakness to persist through early 2011. Table 1: J.P. Morgan EPS Estimates vs. Consensus $ C3Q10E C4Q10E C2011E JPME Cons. % Delta JPME Cons. % Delta JPME Cons. % Delta INTC $0.48 $0.50 -4.2% $0.47 $0.50 -6.6% $1.60 $1.90 -15.9% TXN $0.67 $0.69 -2.9% $0.50 $0.63 -20.6% $2.00 $2.57 -22.0% RFMD $0.10 $0.12 -18.0% $0.10 $0.14 -25.9% $0.33 $0.50 -33.5% XLNX $0.65 $0.65 0.8% $0.52 $0.63 -17.9% $2.26 $2.54 -11.0% ALTR $0.63 $0.64 -1.9% $0.50 $0.64 -21.3% $1.63 $2.42 -32.5% MCHP $0.52 $0.52 -0.8% $0.44 $0.54 -18.5% $1.83 $2.17 -15.7% ONNN $0.18 $0.20 -11.3% $0.16 $0.21 -22.7% $0.63 $0.86 -26.7% CY $0.15 $0.15 2.0% $0.07 $0.14 -49.6% $0.27 $0.56 -51.4% LLTC $0.64 $0.60 6.3% $0.55 $0.59 -7.1% $2.41 $2.43 -0.8% MXIM $0.38 $0.35 8.3% $0.24 $0.34 -29.6% $1.18 $1.44 -18.1% Average -0.7% -18.0% -17.8% Source: J.P. Morgan estimates, Bloomberg, Company Data. Average excludes AMD, RFMD, and CY Book-to-Bill Ratios Dropping The semiconductor industry’s book-to-bill ratio is one of the leading indicators of business momentum and order rates. We expect companies with high exposure to the industrial and communications end markets to report a book to bill ratio of roughly 1.0 due to double ordering and some recovery in end demand, while companies with high exposure to the handset and computing end markets should report a book to bill ratio less than 1.0 due to the current downturn. 2
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Table 2: Book to bill trends 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E ALTR <1.0 >1.0 1.0 >1.0 >1.0 >1.0 1.0 <1.0 CY <1.0 >1.0 >1.0 >1.0 >1.0 >1.0 1.0 <1.0 RFMD <1.0 >1.0 >1.0 >1.0 >1.0 <1.0 <1.0 <1.0 TXN <1.0 >1.0 >1.0 >1.0 >1.0 1.0 <1.0 <1.0 MXIM <1.0 >1.0 >1.0 >1.0 >1.0 >1.0 <1.0 <1.0 LLTC <1.0 >1.0 1.0 >1.0 1.0 >1.0 1.0 <1.0 XLNX <1.0 >1.0 1.0 >1.0 1.0 >1.0 <1.0 <1.0 Companies with book-to-bill >=1.0 0 of 7 7 of 7 7 of 7 7 of 7 7 of 7 6 of 7 3 of 7 0 of 7 Percentage 0% 100% 100% 100% 100% 86% 43% 0% Source: Company Reports, J.P. Morgan estimates As the table below indicates, we expect below-seasonal QoQ revenue growth in 3Q10 for companies with high exposure to the PC and wireless end markets such as INTC, AMD, TXN, RFMD, and ONNN. We expect above seasonal QoQ revenue growth in 3Q10 with companies with high exposure to the communications and industrial end markets such as XLNX, ALTR, MCHP, LLTC, and MXIM. We expect below seasonal revenue growth for most of our companies in 4Q10 as we expect the downturn to spread to the communications and industrial end markets. Our 2011 YoY revenue growth estimates are roughly 7% below consensus as we expect the weakness to persist through early 2011. Table 3: Revenue QoQ growth - Consensus versus JPM & Seasonality % C3Q10E QoQ Revenue Growth C4Q10E QoQ Revenue Growth C2011E YoY Revenue Growth JPM Cons. Normal JPM Cons. Normal JPM Cons. Delta Estimate Seas. Estimate Seas. Estimate INTC 2.2% 2.2% 9.3% 4.5% 2.3% 8.9% 1.0% 3.3% -2.3% AMD -3.2% -2.3% 9.5% 3.1% 2.5% 13.9% -2.7% 1.7% -4.4% TXN 3.0% 5.5% 4.6% -13.9% -5.2% -8.2% -6.7% 1.4% -8.1% RFMD 0.4% 0.4% 11.8% 0.0% 1.9% 4.8% 0.5% 1.5% -1.0% XLNX 5.9% 5.5% -2.1% -9.5% -0.4% -0.2% 2.0% 7.3% -5.3% ALTR 12.9% 11.9% 0.1% -10.4% -2.5% -5.8% -10.5% 6.6% -17.0% MCHP 6.0% 5.7% 2.4% -5.9% 2.6% -1.3% 2.5% 11.7% -9.2% ONNN 2.9% 2.9% 4.0% -4.2% -1.0% 1.4% -3.0% 2.5% -5.4% CY 7.6% 6.6% 4.6% -10.4% 0.0% 0.9% 0.0% 10.0% -10.1% LLTC 6.5% 5.4% 3.2% -7.7% -0.2% 0.7% 7.2% 8.3% -1.2% MXIM 7.8% 8.5% 2.3% -14.8% -1.3% 3.3% -4.3% 7.5% -11.8% Avg 4.7% 4.8% 4.5% -6.3% -0.1% 1.7% -1.3% 5.6% -6.9% Source: Company Reports, Bloomberg and J.P. Morgan estimates. Utilization Rates Likely Peaked in 3Q10 Utilization rates are among the biggest drivers of gross margin for semiconductor companies. According to SICAS, utilization increased by 250 basis points QoQ from 93.2% in 1Q10 to 95.7% in 2Q10, roughly in line with our expectation of 95.4%. We expect utilization rates to increase to 96.0% in 3Q10 due to a 2% sequential increase in capacity and a 2% increase in wafer demand. Consequently, we believe gross margins for the overall semiconductor industry also peaked during 3Q10. 3
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com After peaking at 96% during 3Q10, we expect utilization rates to decline to 90% in 4Q10 due to an inventory correction. We note that both utilization rates and semiconductor stocks have followed the same pattern as in 2004 but with a one quarter lag. In 2004 semiconductor stocks peaked in the first quarter and utilization rates peaked in the second quarter. Similarly, we believe semiconductor stocks peaked in 2Q10 and expect utilization rates to peak in 3Q10. Figure 1: SICAS Capacity Utilization vs. SOX % 1400 100% 95% 1200 90% 1000 85% 80% 800 75% 600 70% 400 65% 60% 200 55% 0 50% Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct06 Oct-07 Oct-08 Oct-09 Oct-10 Jan-94 Apr-94 Jul-94 Jan-95 Apr-95 Jul-95 Jan-96 Apr-96 Jul-96 Jan-97 Apr-97 Jul-97 Jan-98 Apr-98 Jul-98 Jan-99 Apr-99 Jul-99 Jan-00 Apr-00 Jul-00 Jan-01 Apr-01 Jul-01 Jan-02 Apr-02 Jul-02 Jan-03 Apr-03 Jul-03 Jan-04 Apr-04 Jul-04 Jan-05 Apr-05 Jul-05 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Jul-07 Jan-08 Apr-08 Jul-08 Jan-09 Apr-09 Jul-09 Jan-10 Apr-10 Jul-10 SOX Utilization Utilization Forecast Source: Reuters, SICAS, and J.P. Morgan estimates Unit and Revenue YoY Growth Plummeting in 2H10 As the figure below illustrates, we believe YoY unit growth in 2010 peaked in January at 62% and will decline significantly to a trough of 8% in December. 4
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Figure 2: Semiconductor YoY Unit (ex-discretes) growth vs SOXX 70% 1400 50% 1200 30% 1000 10% 800 -10% 600 -30% 400 -50% 200 -70% 0 Jan-92 Jun-92 Nov-92 Jul-94 Dec-94 May-95 Oct-95 Jan-97 Jun-97 Nov-97 Jul-99 Dec-99 May-00 Oct-00 Jan-02 Jun-02 Nov-02 Jul-04 Dec-05 May-05 Oct-05 Jan-07 7-Jun 7-Nov Jul-09 Dec-09 May-10 Oct-10 Apr-93 Sep-93 Feb-94 Mar-96 Aug-96 Apr-98 Sep-98 Feb-99 Mar-01 Aug-01 Apr-03 Sep-03 Feb-04 Mar-06 Aug-06 Apr-08 Sep-08 Feb-09 Unit Growth (ex discretes) Y/Y SOXX Source: WSTS, Factset, Bloomberg, J.P. Morgan estimates Similar to units, we believe YoY revenue growth peaked in 1Q10 due to easy comps. We believe the 3-month rolling average YoY revenue growth in 2010 peaked in March at 60% and will trend down to a trough of 5% in December as the easy comps in 1Q10 go away. Figure 3: Semiconductor Sales - 3 month RA YoY Growth and Forecasts $ in billions, % 30 80% 25 60% 40% 20 20% 15 0% 10 -20% 5 -40% 0 -60% Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sales Sales Forecast Growth Y/Y Growth Y/Y Forecast Source: WSTS, Factset, Bloomberg, J.P. Morgan estimates 5
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Revenue Flat and Units Down in 2011 In 2011 we expect MoM revenue growth to peak in March and to bottom in April and MoM unit growth to peak in March and then to bottom in October. We expect revenue to remain roughly flat YoY in 2011 at $294.5 billion, with units decreasing 6% YoY and ASPs increasing 6% YoY. Table 4: YoY Change in Semiconductor Units, ASP, and Revenue %, $ billions Revenue Unit Growth ASP Growth Growth Revenue 1992 0% 10% 10% $59.9 1993 10% 17% 29% $77.3 1994 15% 15% 32% $101.9 1995 25% 13% 42% $144.4 1996 -2% -6% -9% $132.0 1997 19% -12% 4% $137.2 1998 1% -9% -9% $125.5 1999 16% 2% 19% $149.4 2000 25% 10% 37% $204.4 2001 -21% -14% -32% $139.0 2002 14% -11% 1% $140.7 2003 9% 8% 18% $166.4 2004 18% 8% 28% $213.0 2005 5% 2% 7% $227.5 2006 14% -4% 9% $247.7 2007 12% -8% 3% $255.6 2008 -3% 1% -3% $248.6 2009 -6% -4% -9% $226.3 2010E 26% 4% 30% $294.2 2011E -6% 6% 0% $294.5 Source: SIA and J.P. Morgan Estimates 3Q10 Semi Inventories Expected to Be Highest Since 4Q08 We expect semiconductor companies’ inventories to again increase sequentially during 3Q10 following a sequential increase of 2 days in 2Q10 due to increased capacity. We believe inventories will rise 4 days from 78 days in 2Q10 to 82 days in 3Q10, 6 days above the 5-year average of 76 days and the highest level since reaching 87 days in 4Q08. Our checks indicate multiple semiconductor companies are experiencing slower bookings and push-outs in 3Q10, indicative of the weaker macroeconomic conditions in the U.S. and Europe as well as an easing of component supply constraints. We expect many companies to report lower book to bill ratios and increasing inventories during 3Q10 earnings and would view this as additional evidence of a downturn. We would also look for additional instances of push-outs during 4Q10. 6
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Figure 4: JPM Semi Universe Inventory Trends Days Days of Inventory, JPM Semi Universe 100 95 92 90 88 87 86 85 85 5 year Average Inventory 81 82 81 81 81 days = 76 79 79 79 80 77 78 77 76 75 76 73 73 74 75 73 71 71 71 71 70 69 70 69 69 70 70 67 68 68 67 66 65 64 60 55 50 45 40 35 30 3Q10E 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Source: Company Reports, JP Morgan estimates Note: Companies include INTC, AMD, MU, NVDA, XLNX, ALTR, LSCC, CY, MCHP, RFMD, TQNT, TXN, LLTC, MXIM, ADI, NSM, IRF, FCS, ISIL, SMTC, BRCM, MRVL, PMCS, MSCC, LSI, SGTL, MLNX, QI PC Demand Stable But Well Below Normal Our recent checks from Taiwan indicate PC demand is currently stabilizing at very low levels after a host of PC companies pushed out orders throughout the supply chain in late July and early August. Our J.P. Morgan notebook ODM analyst, Alvin Kwock, expects a 1% QoQ unit decrease during 3Q10, well below normal seasonality of a 22% QoQ increase. We note that Intel and AMD both lowered 3Q10 guidance, citing weak consumer PC demand in the U.S. and Europe. Our J.P. Morgan Taiwan hardware analyst, Gokul Hariharan, expects 3Q10 clone motherboard shipments to increase roughly 20% QoQ, in line with normal seasonality of up 20% QoQ. Mr. Hariharan expects 4Q10 motherboard shipments to decrease 6% QoQ, below normal seasonality of down 2% QoQ due to slower sell- through in 4Q10. We believe PC demand will remain soft in 4Q10 due to continued weakness in consumer PC demand in mature markets as well as from further cannibalization of netbooks and entry notebooks by tablets. Our J.P. Morgan notebook analyst, Alvin Kwock, expects notebook ODM shipments to increase roughly 5% sequentially in 4Q10, below normal seasonality of up 19% QoQ. 7
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Table 5: QoQ Growth Rates of Tier-1 Taiwan Motherboard/Notebook Vendors, Intel QoQ Growth 1Q10 2Q10 3Q10E 4Q10E Intel QoQ Total Revenue Growth -3% 5% 2% 5% Prior Year Comparable -13% 12% 17% 13% Normal Seasonality Intel Revenue -8% -3% 9% 9% Tier-1 Taiwan Notebook QoQ Unit Growth -7% 7% -1% 5% Prior Year Comparable -19% 17% 26% 10% Normal Seasonality -8% 10% 22% 19% Tier-1 Taiwan Motherboard QoQ Unit Growth 10% -15% 20% -6% Prior Year Comparable -6% -13% 20% -6% Normal Seasonality -6% -7% 20% -2% Source: Company reports and J.P. Morgan estimates. PC Supply Chain Inventories Increase in 2Q10 We estimate 2Q10 PC supply chain days of inventory increased by roughly 2 days QoQ from 55 days in 1Q10 to 57 days in 2Q10. We note that 2Q10 marked the second consecutive sequential increase in PC supply chain inventories since bottoming in 4Q09 at 50 days. We expect PC supply chain inventories to increase in 3Q10 due to order cuts and pushouts from OEMs such as HP, Lenovo, and Acer. We note that the current inventory downturn looks like the 2009 upturn, but in reverse. After bottoming in 1Q09, the upturn in semiconductor fundamentals started with PC end market strength as Intel beat consensus estimates and raised guidance in April 2009. We are now seeing a reversal of this pattern as the PC market appears to have reversed course and appears to be leading the current downturn in 3Q10. Figure 5: PC End Market Supply Chain Inventory Levels Days of Inventory 120 100 Avg Inv Days (since '96) = 71 Days 5 year Avg = 58 days 80 60 114 109 104 102 103 101 106 96 83 86 85 84 40 8180 77 7577 76 7473757471 70 6769 68 62 62 59 646462636364 62 58 5858595855575656 60 5860 60565855 57 52 54 55 50 20 0 Q1-96 Q2-96 Q3-96 Q4-96 Q1-97 Q2-97 Q3-97 Q4-97 Q1-98 Q2-98 Q3-98 Q4-98 Q1-99 Q2-99 Q3-99 Q4-99 Q1-00 Q2-00 Q3-00 Q4-00 Q1-01 Q2-01 Q3-01 Q4-01 Q1-02 Q2-02 Q3-02 Q4-02 Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Q2-04 Q3-04 Q4-04 Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Source: Company reports, Bloomberg, and J.P. Morgan estimates. 8
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com PC Component Inventory Expected to Increase in 3Q10 We estimate 2Q10 component inventory at PC semiconductor companies increased roughly 4 days QoQ from 71 days in 1Q10 to 75 days in 2Q10, in line with the normalized level of roughly 75 days. We expect most semiconductor companies with high exposure to the PC end market to report increasing inventory during 3Q10 earnings due to push-outs and order cancellations from multiple PC OEMs during July and early August. We believe the PC inventory correction will continue into 4Q10 as the supply chain still needs to digest some excess components. Figure 6: PC Semiconductor Inventory Levels Days of Inventory 100 5 Year Average = 75 Days 90 80 70 60 50 94 93 85 87 87 40 78 79 77 80 77 78 77 75 75 75 73 73 72 7172 72 74 70 70 69 67 69 68 71 66 66 64 65 62 62 61 30 57 60 57 56 56 56 51 50 52 4646 48 44 45 20 10 0 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Source: Company reports and J.P. Morgan estimates. Handset Demand Below Seasonal in 3Q10 We note that several wireless handset OEMs have provided below-seasonal guidance for 3Q10, including Nokia, LG, and MediaTek. Additionally, our JPM communications analyst, Rod Hall, expects 3Q10 global handset shipments to increase 4% QoQ, well below normal seasonality of a 7% QoQ increase. Further, NSM recently mentioned it was experiencing slower bookings from large wireless handset OEMs (25% of F1Q11 sales). We expect below-seasonal order rates from the handset end market for companies such as Texas Instruments and RFMD during 4Q10. We note that our MediaTek analyst, Alvin Kwock, recently stated that he expects weakness to persist through mid 2011. Additionally, our J.P. Morgan telecommunications analyst, Rod Hall, expects total 4Q10 handset shipments to increase 11.0% QoQ, below normal seasonality of a 14% QoQ increase. As a result, we are concerned about an inventory buildup in 4Q10. 9
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Communications End Market—End Demand Waffling We note that Cisco missed F4Q10 consensus estimates and guided F1Q11 revenue below consensus, the first sign that demand from the telecom sector could be slowing. We are also concerned about order cancellations due to double ordering from the wireless infrastructure end market as PMC Sierra (J.P. Morgan analyst, Harlan Sur, rated OW) recently lowered its 3Q10 guidance due to a slowdown in its China OEM communications business. We are now convinced that Xilinx and Altera will experience an inventory correction due to slowing end demand combined with our belief of massive double ordering. Comm supply chain inventory Up Our proprietary communications inventory model, which factors inventory at OEM and EMS companies, shows that total supply chain inventory increased 8 days QoQ from 78 days in 1Q10 to 86 days in 2Q10, in line with the normalized level of 86 days and below the average Q2 inventory level of 88 days driven by QoQ increases at Alcatel-Lucent, Ericsson, Ciena, and Flextronics. Figure 7: Communications End Market Supply Chain Inventory Trends 180 Inventory Writedowns Added Back 160 17 Avg Inv Days ('96-'99, '02-'08) = 86 Days Wireline OEM+EMS Inventory Days 140 18 25 120 22 26 2023 4 8 100 17 6 5 2 2 1 22 14 1 0 11 3 1 1 0 1 0 0 0 0 80 4 2 0 150 0 0 7 0 0 137 126 128 60 117 0 106 110 106 105 105 9699 95 9797 91 999798 9490 9090 92 958889 949091 89 85 81 89 81 81 8583 86 85 8688 87 86 40 79 79 78 78 7774 78 67 69 67 71 69 65 59 20 - Q1-96 Q2-96 Q3-96 Q4-96 Q1-97 Q2-97 Q3-97 Q4-97 Q1-98 Q2-98 Q3-98 Q4-98 Q1-99 Q2-99 Q3-99 Q4-99 Q1-00 Q2-00 Q3-00 Q4-00 Q1-01 Q2-01 Q3-01 Q4-01 Q1-02 Q2-02 Q3-02 Q4-02 Q1-03 Q2-03 Q3-03 Q4-03 Q1-04 Q2-04 Q3-04 Q4-04 Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 OEM+EMS Days 106 Excess Inventory Source: Company reports and J.P. Morgan estimates. Xilinx and Altera outgrowing comm end market by > 50%? Revenue from Xilinx’s and Altera’s largest end market—Communications—is estimated to be 55% on average above the prior peak while revenue at top communication OEMs should be only 4% above the previous peak. Given the apparent slowdown in demand from the communications end market and the large discrepancy between semiconductor revenue and OEM revenue, we believe an inventory correction is inevitable, similar to what we are seeing in the PC market. As shown below, Xilinx's comm revenue of $296.3 million in C3Q10E is estimated to be 44% above its prior peak of $205.6 million in C2Q08, and Altera’s estimated comm revenue of $209.0 million in C3Q10E is 72% above its prior peak of $121.3 million. 10
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Table 6: Estimated Revenue from Communications End Market $ Millions, % Communications Prior Peak in Estimated % Above Peak as % of Total Revenue C3Q10E Revenue Xilinx 47% $205.6 $296.3 44% Altera* 42% $121.3 $209.0 72% Combined $326.9 $505.3 55% Source: Company reports and J.P. Morgan estimates. * Altera revenues from Telecom & Wireless segment As the table below indicates, Altera revenue of $530.0 million in 3Q10E should be roughly 47% above its previous peak of $360.0 million set during 2Q08, while revenue at top communications OEMs is roughly 4% above the previous peak. Further, Xilinx revenue of $630.0 million in F2Q110E should be roughly 29% above its previous peak of $488.0 million set during C2Q08. We believe that OEMs could be building inventory, which places the PLD sector in jeopardy of double ordering. Table 7: OEM vs. PLD Revenue from Peak $ millions, % Previous Delta Cycle 3Q10E to C1Q08 C2Q08 C3Q08 C4Q08 C1Q09 C2Q09 C3Q09 C4Q09 C1Q10 C2Q10 C3Q10E Peak Previous Revenue Peak Cisco $9,791 $10,364 $10,331 $9,089 $8,162 $8,535 $9,021 $9,815 $10,368 $10,836 $10,735 $10,364 3.6% Alcatel- $6,028 $6,448 $5,285 $6,383 $4,773 $5,558 $5,430 $5,511 $4,156 $4,936 $4,979 $6,448 -22.8% Lucent ZTE $1,111 $1,421 $1,364 $1,802 $1,505 $2,069 $1,953 $2,031 $1,945 $2,153 $2,174 $1,421 53.0% Ericsson $7,328 $8,019 $6,516 $8,057 $6,167 $7,031 $6,520 $7,995 $6,280 $6,564 $6,607 $8,019 -17.6% Total $24,258 $26,252 $23,496 $25,332 $20,607 $23,193 $22,924 $25,352 $22,749 $24,490 $24,495 $26,252 4.0% OEMs Xilinx $476 $488 $484 $458 $395 $376 $415 $513 $529 $595 $630 $488 29.1% Altera $336 $360 $357 $315 $265 $279 $287 $365 $402 $469 $530 $360 47.2% Lattice $57 $58 $58 $50 $43 $47 $49 $55 $70 $77 $80 $58 37.1% Actel $55 $58 $53 $53 $48 $45 $47 $50 $52 $58 $61 $58 4.3% Total $923 $964 $952 $876 $752 $747 $798 $983 $1,054 $1,199 $1,300 $964 29.4% PLDs Source: Company reports, Bloomberg, and J.P. Morgan estimates. Company Reviews Altera (ALTR/$29.51/N) On September 7 Altera provided an update on its business for the first two months of its 3Q10. The company raised its 3Q10 revenue guidance from its previous range of up 4-8% QoQ to a range of up 10-14% QoQ, above our previous estimate of a 7% QoQ increase. As a result, we expect 3Q10 revenue and EPS to be in line with our estimates of $530.0 million (up 13% QoQ) and $0.63 (with options expense), respectively, above the consensus revenue estimate of $525.0 million (up 11% QoQ) but $0.01 below consensus EPS of $0.64. Although we expect Altera to guide 4Q10 revenue “flattish,” we are maintaining our estimate of a 10% QoQ decrease as we expect the communications end market (estimated 42% of 2Q10 sales) to enter a correction relatively soon. We note that normal seasonality for the fourth quarter for Altera is a 6% QoQ decrease. Our 4Q10 11
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com revenue estimate of $475.0 million (down 10% QoQ) is well below consensus of $512.0 million (down 3% QoQ). We are forecasting 4Q10 Altera EPS of $0.50 including options expense, $0.14 below consensus of $0.64. Advanced Micro Devices (AMD/$6.87/N) On September 22 AMD lowered its 3Q10 revenue guidance from up seasonally QoQ to a range of down 1-4% QoQ ($1.59-1.64 billion), below normal seasonality of up 5-10% QoQ due to weaker than expected consumer notebook demand in Western Europe and North America. We expect revenue to decline 3% sequentially to $1.60 billion, below normal seasonality and slightly below the consensus estimate of $1.61 billion due to weakness in consumer PC demand in mature markets. We expect AMD to report 3Q10 EPS of ($0.10), $0.04 below consensus of ($0.06). We expect AMD to guide for 4Q10 revenue to increase 3% QoQ to $1.65 billion, below the normal seasonal increase of approximately 14%, but in line with the consensus estimate of $1.65 billion due to continued weakness in the PC end market. We expect EPS of ($0.11) for 4Q10, $0.09 below consensus of ($0.02). Cypress Semiconductor (CY/$12.70/UW) Cypress guided 3Q10 revenue to range from $234.0 million to $240.0 million (up 5- 8% QoQ), above normal seasonality of a 5% QoQ increase due to strength in the consumer (~13% of 2Q10 sales) and handset (~15% of 2Q10 sales) end markets. We expect Cypress to report 3Q10 revenue and EPS at the high end of company guidance and in line with our estimates of $240.0 million (up 8% QoQ) and $0.15 due to sustained momentum in SRAM (~40% of 2Q10 sales) and the PSOC chip family (~22% of 2Q10 sales). We are slightly above the 3Q10 consensus revenue estimate of $237.7 million and in line with consensus EPS of $0.15. Although we expect Cypress to guide for “flattish” revenue for 4Q10 due to stable demand, we expect the company to miss the guidance and eventually have 4Q10 revenue decrease 10% QoQ to $215.0 million, below normal seasonality of up 1% QoQ and below consensus of up 7% QoQ to $237.7 million due to an inventory correction in the wireless, consumer, and communications end markets (roughly 65% of 2Q10 revenue combined). We also expect Cypress to guide for 4Q10 EPS of $0.07, below consensus of $0.14. Intel (INTC/$19.40/N) On August 27 Intel lowered its 3Q10 revenue guidance from a range of $11.2 billion to $12.0 billion (up 4-12% QoQ) to a range of $10.8 billion to $11.2 billion (flat to up 4% QoQ), below normal seasonality of up 9% QoQ, due to weaker than expected demand for consumer PCs in mature markets. We expect Intel to report 3Q10 revenue of $11.0 billion (up 2% QoQ), at the midpoint of guidance and in line with consensus of $11.0 billion. We also expect 3Q10 EPS of $0.48, below the consensus estimate of $0.50. We believe Intel will guide for revenue to increase 5% QoQ in 4Q10 to $11.5 billion, below seasonality of up 9% QoQ but slightly above the consensus estimate of $11.3 billion due to continued weakness in the PC food chain. We also expect Intel to post 4Q10 EPS of $0.47, below consensus of $0.50. 12
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Linear Technology (LLTC/$30.83/OW) Linear Technology guided September quarter revenue to increase 4-7% QoQ ($380.8-391.8 million), above normal seasonal growth of 3% QoQ due to strength from the communications, automotive, and industrial end markets (combined 77% of F4Q10 revenue). One of the reasons we have an Overweight rating on Linear is our belief that its exposure to Apple would enable it to post superior revenue growth, and we expect that to continue. As a result, we expect Linear to report September quarter revenue of $390.0 million (up 7% QoQ), above consensus of $384.5 million (up 5% QoQ) and EPS of $0.64, $0.04 above consensus of $0.60. For the December quarter, we expect Linear to guide revenue in line with normal seasonality of a 1% QoQ increase. However, we expect Linear to experience the downturn just like every other semiconductor company (albeit to a lesser extent), and therefore we expect December quarter revenue for Linear to decrease 8% QoQ, in line with our estimate of $360.0 million (down 8% QoQ) but below consensus of $384.9 million (down 1% QoQ). Maxim Integrated Products (MXIM/$18.83/UW) Maxim guided for F1Q11 revenue to range from $600.0-630.0 million (up 6-11% QoQ), above normal seasonality of a 2% QoQ increase due to strength from the consumer and industrial end markets (combined 60% of F4Q10 revenue) and a full quarter of revenue from the Teridian acquisition (estimated 2% of F1Q11E revenue). We expect Maxim’s F1Q11 revenue to be slightly below the midpoint but in line with our revenue estimate of $610.0 million (up 8% QoQ), roughly in line with consensus of $614.2 million (up 8% QoQ). Our F1Q11 EPS estimate is $0.38, $0.03 above consensus of $0.35 due to lower charges. For the December quarter we expect Maxim to guide revenue “flattish” QoQ, slightly below normal seasonality of a 3% QoQ increase due to slowing demand from the consumer and PC end markets, partially offset by stable demand from the industrial end market. However, we expect Maxim December quarter revenue to miss guidance and decrease 15% QoQ due to the downturn. We note that consensus revenue estimate is $606.1 million (down 1% QoQ), well above our estimate of $520.0 million (down 15% QoQ). We expect December quarter EPS of $0.24, $0.10 below consensus of $0.34. Microchip (MCHP/$30.85/N) Microchip guided F2Q11 consolidated revenue to increase 6-7% QoQ ($340.0-343.0 million), above the normal seasonal QoQ increase of 2% due to double ordering driven by extended lead times. We expect F2Q11 revenue to increase 6% QoQ to $340.0 million, roughly in line with guidance and consensus of $339.1 million. We expect F2Q11 EPS of $0.52, in line with consensus. We expect MCHP will guide for F3Q11 revenue to be roughly flattish QoQ ($340.0 million), approximately in line with the normal seasonal decrease of 1% QoQ but below consensus of up 3% QoQ or $347.9 million. Although we expect Microchip to guide revenue flattish, our December quarter revenue estimate is for a QoQ decrease of 6% to $320.0 million, below consensus due to pushouts and order cancellations driven by the downturn. Our F3Q11 EPS estimate of $0.44 is $0.10 below the consensus estimate of $0.54. 13
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com ON Semiconductor (ONNN/$6.99/N) ON Semi guided for 3Q10 revenue to be roughly flat to up 5% QoQ ($585.0-610.0 million), slightly below the normal seasonal increase of up 4% QoQ due to below- seasonal growth in the computing end market (26% of 2Q10 sales). We expect 3Q10 revenue of $600.0 million (up 3% QoQ), in line with the midpoint of guidance, and EPS of $0.18. We note we are roughly in line with the consensus 3Q10 revenue estimate of $600.3 million but below the consensus 3Q10 EPS estimate of $0.20. We expect ONNN will guide for 4Q10 revenue to decrease 4% QoQ to $575.0 million, below the normal seasonal increase of up 1% QoQ and below consensus of down 1% QoQ to $594.2 million due to continued weakness in the PC end market We also expect ONNN to guide for 4Q10 EPS of $0.16, in line with our estimate but below consensus of $0.21. RF Micro Devices (RFMD/$6.35/UW) RFMD guided September quarter revenue to be roughly in line with June quarter revenue of $273.8 million, below normal seasonality of up 7% QoQ, due to an expected decline in revenue from the company’s transceiver business (15% of F1Q11 sales). As a result, we estimate F2Q11 revenue to be roughly flat QoQ at $275.0 million and F2Q11 EPS to be $0.10. We note the consensus F2Q11 revenue estimate is $275.0 million, in line with our estimate, while the consensus EPS estimate is $0.12, $0.02 above our estimate of $0.10. We believe RFMD should guide F3Q11 revenue and EPS roughly in line with our revenue estimate of $275.0 million (flat QoQ) and EPS estimate of $0.10 but revenue below normal seasonality of a 5% QoQ increase due to share loss. Our F3Q11 EPS estimate is $0.10. We note consensus estimates for F3Q11 revenue and EPS are $280.2 million (up 2% QoQ) and $0.14. Texas Instruments (TXN/$28.14/N) On September 9 TI updated its 3Q10 business conditions. The company narrowed its revenue guidance from a range of $3.55-3.85 billion (up 2-10% QoQ) to a range of $3.62-3.78 billion (up 4-8%). TI also narrowed its 3Q10 EPS guidance from a range of $0.64-0.74 to a range of $0.66-0.72. We expect TI’s 3Q10 results should be below the midpoint of their guidance but in line with our 3Q10 revenue and EPS estimates of $3.60 billion (up 3% QoQ) and $0.67 as business conditions softened during September. We note that our estimates are below consensus revenue and EPS estimates of $3.69 billion (up 6% QoQ) and $0.69. We expect TI to guide its 4Q10 revenue to decline roughly 5% QoQ, in line with normal seasonality of a 5% QoQ decrease. However, we expect the company to miss its original guidance due to the worsening downturn and eventually end up in line with our revenue and EPS estimates of $3.10 billion (down 14% QoQ) and $0.50. We note our 4Q10 revenue estimate is below consensus of $3.50 billion (down 5% QoQ) and our EPS estimate of $0.50 is $0.13 below consensus of $0.63. Xilinx (XLNX/$25.93/N) On July 21 Xilinx guided F2Q11 revenue to increase 3-7% QoQ ($612.5-636.3 million) with a book to bill above 1.0. We expect F2Q11 results to be at the high end of guidance and in line with our revenue and EPS estimates of $630.0 million (up 6% QoQ) and $0.65, roughly in line with consensus revenue and EPS estimates of $627.5 million (up 6% QoQ) and $0.65. 14
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Although we expect Xilinx to guide F3Q11 revenue “flattish,” we are maintaining our December quarter revenue estimate of a 10% decrease QoQ or $570.0 million (down 10% QoQ), well below normal seasonality of flat QoQ as we expect the communications end market (47% of F1Q11 sales) to enter a correction relatively soon. Our F3Q11 EPS estimate is $0.52, $0.11 below consensus of $0.63. Our revenue estimate of $570.0 million (down 10% QoQ) is also below the consensus F3Q11 revenue estimate of $624.9 million (flat QoQ). 15
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Companies Recommended in This Report (all prices in this report as of market close on 07 October 2010) PMC-Sierra (PMCS/$7.13/Overweight) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures • Market Maker: JPMS makes a market in the stock of PMC-Sierra. • Client of the Firm: PMC-Sierra is or was in the past 12 months a client of JPM. Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) PMC-Sierra (PMCS) Price Chart Date Rating Share Price Price Target OW $11.5 ($) ($) 18 24-Apr-09 N 6.99 6.00 24-Jul-09 N 8.89 9.50 N $9.5 OW $10.5 01-Oct-09 OW 9.18 11.50 12 15-Jul-10 OW 8.17 11.00 N $6 OW $11 22-Sep-10 OW 7.79 10.50 Price($) 6 0 Oct Jul Apr Jan Oct Jul 06 07 08 09 09 10 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Oct 30, 2002 - Sep 10, 2004, and Oct 20, 2009 - Jul 15, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Christopher Danely: Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Cypress Semiconductor (CY), Intel (INTC), Linear Technology (LLTC), Maxim Integrated Products (MXIM), Microchip Technology (MCHP), National Semiconductor (NSM), ON Semiconductor Corporation (ONNN), RF Micro Devices (RFMD), Texas Instruments (TXN), Xilinx (XLNX) 16
    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research 46% 43% 12% Coverage IB clients* 49% 45% 33% JPMS Equity Research Coverage 43% 48% 8% IB clients* 69% 60% 50% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. 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    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. 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    • Christopher Danely North America Equity Research (1-415) 315-6774 08 October 2010 chris.b.danely@jpmorgan.com 19