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Despite better-than-expected sales performances from


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and PC makers in the December quarter of 2001, the chip industry is still searching for a bottom.

Opening the week, the Semiconductor IndustryAssociation put out its numbers for December and the full year 2001, and they were nothing to cheer. PC and wireless devices slowed the sector's steepdecline, but they're not expected to push the market to strength for aquarter or two.

The numbers outline the trauma: Chip sales fell from $204 billion inthe high-altitude days of 2000 to a mere $139 billion in 2001, a 32% drop. But SIA president George Scalise focused attention onthe second half of 2001, as the fourth quarter's sales seemedto stabilize, falling ever so slightly from $31.57 billion in the third quarter to $31.22 billion in the fourth.

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Investors would love the fourth quarter to symbolize the sought-after chip-market bottom, but unfortunately sales slidsequentially once again. As for the individual months, December keeps thetiming of a bottom alive, because sales dropped off 4% from November toDecember. Of course, the third quarter contained some influence frombusiness confusion following the Sept. 11 attacks, and a slower Decembercould incorporate some of the postholiday order seasonal slowdown.

Needham analyst Dan Scovel shrugs that 2001 "disappointed right up to the bitter end" with a December decline he considers "somewhat worse than seasonally normal."

Obviously there's some comfort in the slowed pace of the industry'sfall. To put the fourth quarter's performance in perspective, sales dropped1% sequentially, compared to the 20% drop from the first quarter to the second quarter and the following 15% sales slowdown from the second to third.

Semi Tough
Chip sales continued to drop in the second half of 2001

Source:Semiconductor Industry Association

It will take several months, however, before the crushing year-over-year declines start to improve. Chip sales in 2001, while not up to 2000'ssnuff, opened the year at $16.63 billion, with February revenue at $15.48billion and March at $13.72 billion. December results were 43% lighter in 2001 than they were in 2000.

"Our view here is that we've hit the bottom. We're pretty confident about it," Scovel says. "We're going to roll along the bottom for a few months. This is a year of convalescence, not recovery. Business conditions remain very depressed, and we won't get the basis for meaningful life until later this year, when Christmas season rolls around again."

Robertson Stephens chip analyst Eric Rothdeutsch expects a 5% industrysales decrease from full-year 2001, to $132 billion in 2002. Spread evenlyover 12 months, sales would work out to $11 billion a month, calculating outto negative year-over-year comparisons until July, when chip sales in 2001finally got down to a comparably dismal level of $10.86 billion.

Of course, an $11 billion January finish is not necessarily in the works. Chip companies like Intel have reminded investors that there is no clear signof reinvigorated corporate IT spending to break them out of their typical first-quarter seasonal downturn, and tech companiesare widely signaling the second half of 2002 as key to meeting full-yearrevenue targets.

Intel expects its revenue to be flat or to decline up to 7%in the first quarter of 2002. Meanwhile, AMD predicts a 5% decline in thefirst quarter and sees a 20% increase in the second half of the yearcarrying it to its final sales projections.

The chip industry could spend many more months languishing on the way to recovery.