The latest tech casualties of SARS are Motorola ( MOT) and TriQuint ( TQNT), which in the past week have each blamed the disease for hurting sales in Asia. But RF Micro Devices ( RFMD) and Skyworks ( SWKS), which play in the same market, certainly aren't immune from the same earnings cooties -- if not now, then possibly later in the year. The two cell-phone chipmakers claim lousy business in Asia is already built into their June quarter forecasts. They've already disappointed Wall Street with (identical) forecasts for sequential sales to be flat to down 5%, issued back in April. Now, trying to shift attention away from the itchy and uncomfortable present, RFMD and Skyworks are talking up the prospects of an improved second half of the year. But with the leading cell-phone market -- China -- ailing from both SARS and a hefty inventory buildup, that doesn't make such a convincing story. At the CIBC conference in New York Monday, the leaders of the two companies put on their chipper faces. "Right now the quarter is turning out just like we expected," said RFMD chief Bob Bruggeworth in a Webcast panel discussion, suggesting that Motorola's Monday warning wasn't unexpected. "The major OEMs have a lot of optimism about the second half of the year." Skyworks CEO Dave Aldrich agreed: "Our customers are looking at a much stronger second half than first half."
Weak Demand, Inventory BuildBut in fact, one of Skyworks' biggest customers is Motorola, the world's second-biggest handset maker, which accounted for 12% of sales last year. Motorola said Monday that sales and earnings for the rest of the year would be below its expectations, courtesy of SARS and an inventory buildup among local Chinese manufacturers. Skyworks and RFMD stand to be hurt by the same double-whammy that hurt Motorola, says Ambrish Srivastava of Gerard Klauer Mattison: namely, an unhealthy combo of weak demand caused by SARS and a buildup of inventory that will cannibalize sales.
"What MOT said on the call was that the slower depletion of excess inventory plus slower uptick
in demand will hamper their results in the second half. That's why we have an underperform rating on all three wireless chip names Triquint, Skyworks and RFMD ," he says. "They're not so overvalued like some of the chip names," he acknowledges. "But the fundamentals are so fragile." His firm hasn't done banking for any of the companies. On Tuesday, cell-phone king Nokia ( NOK) affirmed its previously offered earnings guidance for the second quarter, but the company cautioned that mobile-phone sales growth could be at the low end or even below the prior forecast. The company attributed the revision to ongoing economic weakness in Europe and the U.S., currency fluctuations, and the effect of SARS on consumer spending, especially in China. Even highly diversified chipmaker Texas Instruments ( TXN) will find it hard to escape the Asia fallout. In April, industry sales of digital signal processors -- a market TI dominates -- fell far more sharply than is seasonally typical. Revenues were down 46.4% from the prior month, compared to a five-year median decline of 31.2%, based on data from the Semiconductor Industry Association. The inventory build and SARS "don't hurt TI as much" as other players that depend solely on the wireless market, says Michael Mahoney, managing director for hedge fund EGM Capital. But, he adds, "I would note that DSP chips are a major source of growth for TI. It's not as big an effect overall, but it could impact an area that's one of the best drivers in its overall performance." Mahoney says his firm occasionally trades in leading cell-phone chipmakers. He isn't currently long any of the stocks, and EGM doesn't disclose short positions.
China SyndromeEven before Motorola's comments, cell-phone chipmaker TriQuint, which claims Motorola as its leading customer, warned of trouble last Friday. Possibly foreshadowing broader troubles for the other cell-phone chipmakers, TriQuint lowered guidance for the full year, citing soft demand in Asia for handsets and telecom infrastructure. But so far, Skyworks and RFMD haven't fessed up to worries of the same magnitude.
To be sure, Skyworks' primary customer (outside former co-parent Conexant) is robust Samsung, supplying 38% of revenues last year. No. 3 cell-phone vendor Samsung has been a big share gainer, upping its portion of the market to 10.5% in the first quarter of 2003, and that momentum could help insulate Skyworks from the nasty crosswinds. Meanwhile, RFMD draws two-thirds of its sales from leading cell-phone vendor Nokia ( NOK). Any positive takeaway from Nokia's midquarter update will be bound to soothe RFMD investors. Obviously, if Nokia and Samsung can perform relatively well in a tough Asia market, their suppliers will have a leg up. But the top and third-ranked cell-phone vendors can hardly isolate themselves from trends in the world's leading cell-phone market, China. According to Taiwan-based Market Intelligence Center, in April SARS knocked down sales in Beijing and other leading Chinese cities by as much as 80% from year-earlier levels. At the same time, inventory levels have surged among Chinese-based handset manufacturers. MIC says China currently has nearly 24 million handsets in stock -- an inventory level equivalent to 36% of all the handsets sold in the country in 2002. Skyworks CEO Aldrich suggested at the conference yesterday that handset vendors were getting inventory problems under control. But the degree of buildup will make that difficult, and SARS is bound to complicate efforts. Although reports suggest the disease has stopped spreading as rapidly, there's some risk it could rear up again when the flu season gets under way in the fall, points out Mahoney of EGM Capital. In the meantime, those upbeat second-half prognostications have plenty of risk to the downside.