Dissecting The Numbers

Do strong July semi sales point to a stronger second half for 2013? Maybe.

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In the annals of semiconductor history, July is typically the worst month of the year in terms of sequential monthly change. Going back to 1997, semiconductor sales in July are usually down 10% to over 30%.

The chart below shows a pictorial representation of the monthly percent change in July over June for the last 16 years. We’re not implying that everyone should break out the party hats, because July sales were still down but only by 4.8%. That is the second smallest decline in the past 16 years.

To achieve Semico’s 5% to 6% growth for 2013, we expected to see July sales above seasonal expectations at -7.7%. With July actual results slightly stronger than we expected, the challenge to achieve at least a 5+% revenue growth for 2013 is significantly more realistic.

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It’s clear that July has significantly departed from the three-year monthly average percentage change, and it shows an even stronger growth than what was achieved in 2010 when the market reached a 32% annual growth rate.

The big question is, will the July number turn into an inventory excess in a few months, or will electronic sales remain healthy, prompting even more chip sales in the coming months?

The recent strength and upward movement of the Semico IPI index bodes well for a significantly stronger 2H 2013 and 2014. The Semico IPI is a 12-month leading index for semiconductor sales. In February 2012, the IPI predicted that the semiconductor industry would bottom out 12 months later in February 2013. In February 2013 semiconductor sales were only $3.9 billion marking the low point of the year as predicted by the IPI. Since 2012, the IPI has pointed to a positive growth pattern for the second half of 2013. The IPI gained momentum in the second half of 2012 indicating an improved 2H for 2013. More significantly, since January 2013 we’ve seen the IPI maintain a strong upward trend indicating a good 2014.

In the first half of 2013 actual revenues reflected improving sales, at a rate higher than the trend reflected in the IPI. The IPI indicates that the second half of 2013 should result in a stronger growth pattern then was experienced in the first half of 2013. Because semiconductor sales improved more significantly in the first half than the IPI predicted, will we continue to see strong growth through the end of 2013 as the IPI indicates?

It is Semico’s expectation, with guidance from the IPI, that the remainder the year will show an increasing revenue growth rate.

Here’s why Semico believes the second half of 2013 will continue to improve. A significant portion of the increase can be attributed to the memory market. Memory prices increased through the first half of 2013. Semico forecasted DRAM and NAND pricing to hold firm through the remainder of this year. Taking into account the fire in the Hynix DRAM fab, DRAM prices have surged even higher than Semico expected.

DRAM and NAND revenues will contribute more than 66% to the total growth in semiconductor dollar sales. If the memory market experienced zero growth, then the semiconductor market would only grow by 1.6% in 2013.

To a lesser extent, the end markets also will drive increased growth in the second half of 2013. There are three markets which provide the revenue and volume potential.

Smartphone sales remain strong. Both Samsung and Apple have introduced new models. The new models have new features but will that drive a year-end boom? Although it’s possible, Semico does not expect to see an increase in sales due to upgrades. Smartphone manufacturers believe the high-end phone market is saturated and have begun to cater to a lower-end smartphone buyer. The semiconductor bill of material in a low-end smartphone is similar to a fully equipped high-end smartphone; however, the semiconductor content value is lower, resulting in lower semiconductor sales revenues.

The second possible end market growth driver is the 2-in-1 PC. The concept of a detachable screen with an ultra-thin PC that seamlessly transforms into a tablet sounds like a great idea. Will it drive significant sales in the fourth quarter? Our opinion is that it’s an exciting twist to the PC market, but retail pricing still appears to be an issue. These devices range in price from $999 to $1999-plus depending on the system configuration! That price point is not within reach of the everyday consumer.

The tablet market continues to gain momentum and is expected to do well through the end of this year. Will there be new product launches that will dramatically increase the trajectory of tablet sales volume? Semico thinks that is unlikely; however, we are seeing that entry-level tablets are more affordable and are dominating the growth particularly in developing regions.

The downside risks to our forecast include:

  1.  A worsening U.S. and worldwide economy…25% risk.
  2.  Slower than expected economic growth in China, India and South America.
  3. Middle East uncertainty drives oil prices above $125 per barrel…30% risk.
  4. OEM confidence drops, causing conservative builds in Q3 and Q4 2013…30% risk.

Despite the recent seasonal patterns, which indicate the second half of the year should be relatively flat, Semico continues to maintain a positive view on the second half of 2013, primarily driven by memory sales.

J