Roundup – April 3, 2009

Google NOT in talks to acquire Twitter

…though maybe they should, according to several.

FDIC considering issuing notes and equity stakes in PPIPs to banks for toxic assets

Bank sells asset to massively leveraged PPIP and buys stake in same massively leveraged PPIP.  Leveraged risk transferred to taxpayer, leveraged reward transferred back to bank.  Takes leverage in the system to a whole new level.  I tried to draw a flowchart of it and got dizzy.  NYT link also.

Omnivision lands iPhone camera orders

At some significant price discount, to be sure… but there’s a lot of shorts in it.  Micron camera sensor sales missed estimates by 50%.  Might get a chance to buy OVTI on weakness today.

Head of Federal Home Loan Bank System (FHLB) quits over bank marks

The FHLB has some 1.2 trillion in outstanding debt and their books are very overstated.  Not comforting.

Micron conference call transcript

Let me summarize:  gee, we didn’t make as much as we should have when prices rallied.  Fortunately we’ve taken some inventory writedowns so we can inflate gross margins in future quarters.  The industry supply cutbacks will drive prices higher in the second half.

Poly prices fall below $100/kg

I think this is the fourth or fifth article I’ve read about poly prices falling below this mystical $100 level.  It doesn’t seem new.

Altera and Xilinx orders to foundries to increase 10% in 2Q09

Altera orders stronger than Xilinx.  China 3G ramp is likely front-end loaded and unsustainable.

Calling Dick Tracy…

Watch phone.  Dorky.  And cool.  Both really.

Though revenues are better...

Prices of monitors are falling...

As are prices of TVs...

So panel makers still can’t make money

Costs above selling prices will do that despite utilization rising significantly.

Netbooks – all the growth, none of the ASP

Intel’s +$200 ASP on Centrino notebook processors is in some serious danger from these $20-30 Atom chips.

DRAM and NAND prices drift lower on distributor dumping

Distributor dumping is supply chain speak for lack of anticipated demand.  These guys typically load up thinking they can flip chips at higher prices.  Guess it’s not working this time.

Lehman out on semis

Tim Luke out with a summary of his recent trip to Asia, there's a conference call @ 10:30am.

Notebooks remain strong, desktops and servers are weaker; he thinks Intel's second half numbers look conservative. Broadcom and Nvidia could have lowered numbers for the quarter but he believes there's valuation support – I agree there. Not from Lehman, but I've read more than once that a fire at an LG battery plant is constraining notebook builds for HPQ for the quarter and they've ratcheted down their plan for the quarter to get in line w/ their limited battery supply.

Cell phones are weak with inventory adjustments at Nokia and difficulties at Sony Ericsson and Motorola weighing on growth. Totally right, Nokia has been pulling back at the high end at a couple of their supply chain partners.

He cites some slowness in Xbox and PS3. My observation is that following the initial pop following console price cuts, PS3 picked up some share but the data has been moderating. Xbox, which enjoyed an early lead in the market has held up but definitely has been slowing. Halo 3 drove some good console uptake around the holidays but last month's data was showing some sluggishness. The Wii continues to dominate the category. It seems like the only thing keeping Nintendo's console shipments capped is limited supply – it's amazing to me that over a year after it's release one still can't walk into a store and walk out with a Wii.

Apple is still not around and NAND remains weak. Samsung thinks they'll be back in April, Hynix thinks June. I think Apple is symptomatic of the problems in the NAND market. Sure, they're a big portion of the sales. Sure, they matter. At CES I saw literally a hundred different NAND players that no one will buy. That to me is the bigger problem… too many marginal players that don't really belong in the marketplace have created an overestimate of how much NAND is needed. This will take time to correct.

Micron (MU) has the other half of those NAND problems

Since Micron is the co-owner of the NAND joint venture with Intel, expect them to have a bit of nastiness in their results, too. It looks like Intel must've taken a significant write-off in NAND. I'm still trying to get some clarification.

Intel (INTC) lowers 1Q:2008 gross margin forecast

Guess what? NAND prices still suck. Intel lowers gross margin guidance due to NAND pricing. They have to be really bad to be hurting Intel that much since they're not a big chunk of business. Still hating Sandisk and memory capex plays here.

FormFactor (FORM) CFO resigns

I wrote about this company when they reported. The CFO resigning to pursue other interests is a big fat red flag. The stock is down a lot, he's got options, the company is telling you its a temporary business condition. The CFO is telling you he doesn't want to stick around for the recovery -- maybe he's telling you there won't be one... or that the books were cooked. All we know is for whatever reason, he'd rather be somewhere else.

I maintain that there's no way to know how profitable the business actually is because the cost accounting has been screwed up for years. Their customers are all memory manufacturers. Hate this stock.

Sandisk meets with analysts, releases 10K

There's an analyst meeting going on right now. They say business so far this quarter is about as they forecast – lousy.

Sandisk files their 10K. There's some elaboration on the off-balance sheet aspects of their joint ventures with Toshiba to produce NAND flash. The basic gist of it is they own 49.9% (just not enough to not have to include the operations in consolidated results) of the JVs. They're on the hook for 50% of the output. If they incorrectly forecast demand they get stuck with a lot of raw NAND at cost plus a mark-up. They don't really get into how much of a liability that can be but the ventures have been ramping capacity at a significant pace.

There's some currency double-talk. They say they don't really hedge but then say they've got a 500mm+ position short the dollar. They also say they're buying product from Japan that's being produced in China. Confusing.

They intend to spend $4 billion on further off-balance sheet fab equipment over the next 3 years and will likely have to sell debt to raise the cash. That's a very big number, 4 billion. On February 19^th, 2008, Toshiba and Sandisk signed a memorandum of understanding to begin a new 300mm fabrication facility in 2010 – presumably this will involve more spending when the time comes. The potential for debt issuance is not a new issue as analysts have discussed it but it's one thing when business is ripping and the company says things are so good they need to invest further in the business. It's quite another thing when business looks weak.

Why do they continually structure the JV to hide the real P&L of the business? I think it's a multi-billion dollar blind spot in the story and I don't like it.

NAND flash contract prices decline

DRAMExchange is quoting NAND contract for the second half of February down 4-6%. End markets are weak and retail inventories seem likely to be high in this environment. I continue to recommend avoiding companies in the memory supply chain with the exception of Micron, where I think CMOS sensor market share gains, NAND flash accounting and reduced spending by competitors in commodity DRAM will benefit the company on a relative basis.

iSuppli sees weaker NAND market

iSuppli drops their NAND forecast from a silly prior forecast of 27% growth to a more reasonable (but probably still too high) single digit forecast. Most of the reduction is being blamed on Apple's weaker buy plans to suppliers.

I think the horse has been gone from the barn for a while here, guys. To be cutting the NAND forecast based on month old weakness at Apple is pretty lame. Not that it isn't correct... it's just late as hell.

Applied Materials (AMAT) 1Q:08 Results

So much for buying stock at 14.

Applied blew out orders in display for the Q, coming in at 550mm vs expectations of closer to 120mm. Like I said, wish I could buy just that segment. Solar also bested expectations but that should be a given.

Guidance of orders +/- 5% also puts the order outlook above consensus.

Stock will likely continue to trend higher as it will continue to garner attention as a first mover in an upturn and less exposed to the downturn. My caution into the quarter was incorrect. It's a long.

Stock is trading at 19 in the aftermarket.

Applied Materials (AMAT) Order Color

ThinkEquity
We expect orders of $2,100M (+/- $100M) for Jan-08. For April, we anticipate
orders to jump to $2,400M (+/- $100M) driven partly by previously announced
solar contracts. Other segments such as Silicon and Flat Panel are likely to
bounce along the bottom.
In April and July, we anticipate $500-800M in recognized orders from the solar
segment—but note that most of these were contracts booked in 2007.

RBC
We expect street to be surprised positively from 1FQ08 orders and 2FQ08 order
guidance. We expect January 1FQ08 orders to come significantly above the
guidance of down 5%-15% q/q due to strength in Flat Panel Display (FPD)
orders. While peers have guided March 1CQ08 orders down 10% or more, we
expect flat 2FQ08 orders guidance. We expect management's tone bullish due to
FPD strength and potential upside from solar segment. The stock would likely
trade higher after the call.

Stifel
April Quarter Outlook: We expect the company to deliver a mixed outlook based
on strength in its FPD and solar, offset by continued weakness in its core semi
cap business. In terms of its bookings guidance, we would not be surprised to
see a range of +5% to -5% sequentially, as semi cap weakness (down 5-10%) is
offset somewhat by continued momentum in its FPD and solar businesses. At this
time, we are comfortable with our 2Q08 estimates of $2.1 billion in revenue and
pro forma EPS of $0.25, excluding options ($0.23, including options).


Stanford
We expect AMAT to guide to total company order growth of flat to up 5% in
2Q08. We believe AMAT's silicon systems orders will be flat, flat panel and
adjacent technologies will be up 10%-15% and service will be down slightly.
We expect revenue guidance to be about flat with 1Q08 at $2.1 billion with EPS
of $0.21.
AMAT could suggest that 2008 global capex will be down 10%-15%, unchanged
from prior guidance. While not likely to improve materially near-term, we
expect AMAT to say industry orders have troughed.

Applied Materials (AMAT) 1Q:08 Preview

Estimated Reporting Date	Symbol	Revenue Estimate Current Q	Operating Profit Estimate Current Q	EPS Estimate Current Q	EBITDA Estimate Current Q	Revenue Estimate Next Q	Sequential Revenue Growth Estimate, Percent	Operating Profit Estimate Next Q	EPS Estimate Next Q	EBITDA Estimate Next Q	Revenue Estimate Full Year	Operating Profit Estimate Full Year	EPS Estimate Full Year	EBITDA Estimate Full Year	Revenue Estimate Next Year	Operating Profit Estimate Next Year	EPS Estimate Next Year	EBITDA Estimate Next Year
2/12/2008	AMAT	2,007.6	381.5	0.20	480.3	2,064.8	2.85%	426.9	0.22	530.9	8,765.7	1,916.8	1.02	2,166.7	10,126.6	2,567.7	1.34	2,617.5

The skinny: Applied Materials is the behemoth in the semiconductor capital equipment market. By virtue of their size and breadth of their product portfolio, they tend to have the most diversification amongst individual semiconductor subsector end markets. Despite this diversification, memory represented 67% of orders last quarter – roughly 2/3 of that was DRAM, or 44% of overall orders.

For the last couple of quarters, analysts have been looking for a recovery in foundry spending (currently 19% of orders) to help the company to resume a growth curve. I don't see this happening. Foundry capex plans have come in lower than expected and I can't think of any reason they'd be front-end loaded for 2008 with so much fear of economic slowdown in motion.

Display business picked up significantly last quarter (up 80% q/q) and should show continued strength. The company projected a strong revenue ramp in display products beginning in Q2. As most of their compatriots in the display business (Corning, Photon Dynamics) have already signaled the all-clear, I think they'll be strong here and I wish I could buy just this segment but unfortunately it's stapled to the chicken.

The wildcard in their business is solar, where Applied is spending considerable resources and effort to build a multi-billion dollar solar equipment business. This is great long-term. The issue I have with the stock is I think solar's potential has created unrealistic investor expectations of the stock's likelihood to outperform.

I believe many funds are positioned long Applied and short other memory manufacturers, with the hope that the valuation strength the market has bestowed upon solar will insulate Applied stock from the downturn in the semiconductor business. I don't like situations like this -- too many people know the story. I can see the company having great solar orders, and disappointing on overall orders, where expectations are for a much better outlook. Solar is going to be great... but it's also the least known part of the business in terms of the effect on operations. Revenue and margins in the memory and foundry business, 3/4 of current business, should disappoint. The memory business is off a cliff here and the solar business is too on the come to really hold the stock up right now.

I don't see support until $16.20 and I worry about that support with so many people long the same story with the same expectations. That said, if there were a big dislocation down to $14, I would probably buy some and be prepared to hold it for a couple of years.

Micron says inventories low, prices rising

At their analyst conference today, Micron indicated inventories in NAND are at 2 weeks and inventory in DRAM are at 3 weeks. They said inventories can't go much lower. They also said recent contract negotiations with PC manufacturers have gone well and they were able to raise prices.

Stock is bid up a bit. It probably has more room.

DRAM spot firmer; Micron

I'm reading about this big rally in DRAM spot prices. There have been a lot of capacity cutbacks of late and I guess it's leading to speculation of tighter supply going forward. That will probably prove true at some point, but I think its way too early to be thinking that way.

From what I understand, inventories at the OEM level are pretty high. The lowered guidance from companies like Intel and National Semiconductor are not indications that the situation is about to get better. There's an awful lot of economic concern out there and it wouldn't be surprising to see further weakness in PC sales as we move through this uncertainty.

Micron has some substantial design wins in CMOS sensors (camera phones) at Nokia. I think by mid-2008 they could go from single digit market share at Nokia to the #1 supplier. The Intel NAND business will begin to generate cash for them due to accounting -- for the first few quarters they had to put money in, now they'll be getting cash back. Relative to other companies in the space, they're likely to look pretty good. That said, I don't love their recent re-embrace of the DRAM market. They went from deemphasizing that business as a driver to saying they have to fight it out in the trenches with low cost Asian producers -- a difficult endeavor for a more unionized workforce. I think it's going to be very hard for them to succeed in memory.

I wouldn't chase a DRAM spot rally here.

FormFactor Q4:2007 Results

Unsurprisingly, another memory market supplier takes it on the chin.

Formfactor misses consensus revenues by approximately 5mm, coming in at 120mm versus expectation of 126mm. They blamed the shortfall on manufacturing issues with their new Harmony platform and said lead times have improved on this product significantly -- and wouldn't you know it, bookings declined a bunch. Lower bookings would improve product availability and bring down lead times -- one wonders if anything has changed in terms of their manufacturing issues -- all we know is they can meet demand better than before demand dropped a lot. They seem to be suggesting that customers couldn't wait for them to bring on more test equipment and had to resort to using competitor's available products and telegraphing weakness until at least the second half of the year.

Revenue guidance for Q1 falls to a 3 year low, coming in at 70-80mm versus street expectations of 120mm -- a 35-40% miss. That's... impressive. They lay off 14% of their workforce due to deteriorating DRAM recovery conditions.

And lets not even get into the cost accounting questions that will continue to dog the company. On second thought... lets get into it. This company had very suspicious margins for a prolonged period of time. I say suspicious because they held up amazingly well in an environment where all their competition saw cost pressures that somehow FormFactor managed to avoid. Sometime later, coincident with their CFO's departure, they discovered accounting irregularities. To me, this kind of discovery brings the whole historical model into question. Trying to gauge where business will stabilize is impossible as the measuring stick has the wrong numbers on it.

I'm sure there's value there but good luck figuring out what it is. It's unanalyzable in its current FORM as I think the whole business model is suspect till they clear the accounting dirt. As a bonus, they're a memory capex supplier, which is my least favorite sector.

Apple takes advantage of lower memory prices

Apple announced iPhone and iTouch models with double the memory of existing models for another $100 on either model.

Storage ain't the problem here, guys. It's data speed. We need 3G. And give us a nifty fold-up Macbook Air-type keyboard, please. That touchpad keyboard is sooo Atari 400.

Hynix cuts capex

DRAM capex cut by 43% yoy for 2008E — Compared to its previous guidance
of a disappointing capex cut of W4trn for 2008, Hynix has further lowered its
guidance by 10% to W3.6trn (US$3.87bn, down 25% yoy). More importantly,
DRAM capex is estimated to fall 40% yoy to W2.3trn (US$2.48bn) from 2007’s
W3.84trn (US$4.13bn).

MTSN Q4:2007 Results

Mattson announced better Q4 EPS due to an unanticipated royalty payment from DNS and a tax gain. Ex those items, their operating margin was negative. Revenue guidance was significantly below the street at 42-48 mil versus consensus expectations of 57 mil -- a whopping 25% disappointment. Bookings came in well below estimates for the current quarter and apparently visibility has careened off a cliff as the company has decided not to provide bookings guidance going forward.

Mattson's semiconductor capital equipment business sports 70% exposure into the memory capex market at present. Memory has had an unprecedented wave of capex upgrades over the last few years. It's set up for a really steep decline. I continue to advocate avoiding other companies with large exposure to the memory capex market like VSEA, LRCX, KLAC. It's going to be a house of pain for quite a while.

Sandisk cost accounting seems good... for them

I thought this was worth reprinting:

The resulting price falls halved Toshiba's operating margin in its chip business to 4.8 percent in October-December from 10 percent in the previous quarter, and cut the unit's profit by 60 percent.

Toshiba has a lot more moving parts but they're saying the margin degradation came primarily from NAND flash.

So Sandisk is injecting vast amounts of working capital into an off balance sheet JV (Flashvision, which they co-own with Toshiba) that's hurting Toshiba's results substantially and yet Sandisk reports pretty healthy product gross margins and profits.

I just don't think Sandisk's financial statements give a clear picture of the health of the company. They don't tell you what their real manufacturing costs are. I think it's a deceptive structure.

Memory fades further

Powerchip reported a gross margin of -71%. Last quarter it was -13%.

Promos cut capex substantially yesterday. Elpida followed today with a cut 25% below analyst expectations.

This article rehashes some of the other recent negative data points of the memory capex market.

I don't like the memory capex sector at all. Lam's guidance was far too optimistic. Varian, Lam, KLA Tencor, Mattson... all these stocks have a lot further to fall. Estimates are way too high.

Sandisk Q1:2008 Guidance

Wow, that's pretty terrible. They guide to 775-875mm for Q1, street is ~1 bil. There's that 150mm miss I was talking about. They guide the full year to 15-25% growth, street is at 23%. Numbers will come down pretty hard. I'll have some more summary tomorrow AM.