Chip industry bracing for double-digit revenue decline in Q4

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Chip industry bracing for double-digit revenue decline in Q4

El Segundo (CA) – A deteriorating world economy is hitting chip makers with a sharp drop in sales during the fourth quarter of the year. iSuppli believes that the industry will see its sales contracting by 8.8% sequentially and 10.9% compared to last year. The market research firm also expects 2008 chip revenues to drop for the first time since 2001. The Semiconductor Industry Association (SIA) echoed the difficult environment, but estimates that chip makers will still be able to post a slight revenue increase for the year.

Intel’s recent Q4 warning may have been a first indication of the severity of the situation for chip makers. Market research firms and industry organizations are now chiming in and predict a rough ride caused by the “current global economic turmoil is clearly having a significant impact on semiconductor sales.”

iSuppli said that based on actual third-quarter quarter results of “121 leading semiconductor suppliers” and fourth quarter revenue estimates “founded primarily on financial guidance provided by the major chipmakers,” it now expects 2008 chip revenue of $266.6 billion, which is down 2% from $272.0 billion in 2007. The third and fourth quarter in a year are typically the strongest periods in a year, but have shown to be especially weak in 2008. While Q3 sales were able to grow only 2.5% from Q2 and a relatively low base level, Q4 sales are expected to decline by 8.8% sequentially – and by 10.9% year over year.    

“The first evidence that the semiconductor industry was entering a recession arrived in the third quarter, before the financial crisis began sweeping the world in October,” said Dale Ford, senior vice president, market intelligence services for iSuppli. “iSuppli previously had predicted that the third quarter would generate 7.9% growth in semiconductor revenue compared to the second quarter. However, actual growth in the third quarter came in at a very anemic 2.5% quarter-to-quarter rise. Year-over-year revenue in the third quarter was down by 2.9%.”

Memory makers are once again in the eye of the storm, iSuppli said. The firm noted that “psychology of many industry players now has shifted to a survival mentality, with cost-control and cash-conservation considerations driving decisions. The extremely low level of consumer confidence clearly points to a very difficult fourth quarter for the industry.”

The SIA painted a picture that isn’t quite as bleak, which is mainly caused by slightly different base level numbers. The SIA said that it expects 2008 sales to climb by 2.2% to $261.2 billion, up from $255.6 billion in 2007. However, the organization agrees that sales will see a sharp 5.9% decline in Q4 of this year. For 2009, the SIA believes that overall sales will drop by 5.6% to $246.7 billion, before resuming growth in 2010.   

“The current global economic turmoil is clearly having a significant impact on semiconductor sales,” said SIA president George Scalise in a prepared statement. “The fortunes of the semiconductor industry are increasingly tied to consumer spending on electronic products. Consumer purchases now drive well over half of worldwide semiconductor sales.”

The SIA also noted that first signs of contracting sales emerged during the third quarter of the year. “The September sales figures provided the first sign of a slowdown in semiconductor sales,” Scalise said. “Indications are that both consumer and corporate spending on technology will decline in 2009. Visibility is very limited, and much will depend on how quickly public policy makers can act to restore consumer confidence.”

While we often see a comparison between the climate back in 2001 and now, Scalise said that the tow economic environments are different. “The collapse of semiconductor sales in 2001 was driven primarily by the implosion of ‘’ industries which resulted in an enormous inventory overhang. Excess inventory is not an issue today, and the industry is well positioned to resume growth quickly once the current worldwide economic uncertainty subsides.”