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In this edition of MarketEye, Walt Custer discusses the shocking financial results for Q3, component shipments in Europe, and October sales data in the Taiwan/China region. .

Global Electronic Updates and Forecasts

Walt Custer Nov. 17, 2008

5% OEM 3Q’08 Sales Growth; Down from +11% in 2Q’08

With most of the OEMs in our 61 company global financial composite having now reported their calendar third quarter financials ( Chart 1 ), it appears that electronic equipment sales grew only 5% in 3Q’08 versus 3Q’07 (down from 10.8% growth in 2Q’08 versus 2Q’07). Third quarter net income plunged 36% compared to the same quarter in 2007. Substantially lower “company guidance” for 4Q’08 is common.

3Q’08 Financials Down; 4Q’08 Looks Worse

Intel ( Chart 2 ) shocked the electronics industry by issuing a revised guidance of $8.7 to $9.3 billion in sales for 4Q’08, barely a month after it had predicted $10.1 to $10.9 billion. In its November 12 revision it stated that “fourth-quarter business will be below the company's previous outlook. Intel now expects fourth-quarter revenue to be $9 billion, plus or minus $300 million, lower than the previous expectation of between $10.1 billion and $10.9 billion. Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.”

Nortel Networks ( Chart 3 ) reported a $3.4 billion loss in 3Q’08 when it said on November 10 that "In September, we signaled our view that a slowdown in the market was taking place. In the weeks since, we have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally, further impacting the industry, Nortel and its customers. We are therefore taking further decisive actions in an environment of decreased visibility and customer spending levels."

SEMI CAPEX Sales – down 15% in 3Q’08 with -20% Guidance for 4Q’08

Semiconductor Fab, Test & Measurement companies ( Chart 4 ) saw sales drop 15% in 3Q’08 based upon a 13-company composite. Combined 4th quarter guidance was for a 20% revenue plunge vs. the same quarter in 2007.

Applied Materials ( Chart 5 ) stated on November 12 that, "The last six weeks of turmoil in the financial markets is unprecedented. The weakening global economy will have significant impact on all of Applied's businesses," CEO Mike Splinter said. Applied forecast fiscal first-quarter earnings per share of 0 to 4 cents, with revenue falling 25 to 35% and orders down 30% from the fourth quarter.”

Agilent Technologies ( Chart 6 ) also issued a sober outlook on October 31. Looking to the first quarter of fiscal 2009, CEO William Sullivan noted that the full impact of the global financial meltdown on the world economy was far from clear. "Our planning is based on the assumption that an economic downturn in much of the world will continue through mid-2009, and that no geographies or markets will be entirely immune from its impact." Given these trends, Sullivan said the company expected fiscal first quarter revenues in the range of $1.34 billion to $1.39 billion, down 4% to flat compared with last year. First quarter adjusted net income is expected to be in the range of $0.34 to $0.38 per share, down 6% to up 6% from one year ago. Looking further ahead, Sullivan emphasized the uncertainty in the outlook, but said the company expected 2009 adjusted earnings per share to be roughly flat with 2008 results on revenues that are flat to down 5% from this year.”

European Component Distributors (Down 7% in Third Quarter)

DMASS, representing the European Semiconductor Distribution Industry, reported that component sales dropped 7% in 3Q’08 vs. 3Q’07 and 9% sequentially ( Chart 7 ). A Nov 10 DMASS press release ( Chart 8 ) stated “The downturn was almost unanimous, driven by a combination of less demand and further price erosion. Everything that still was right a quarter ago now seems to be uncertain, exacerbated by the fear of a global recession. However, we still think that the fundamentals of the European electronics industry, which is highly specialized and export-oriented, are still right and will bring Europe back on track soon.”

Taiwan/China Update – Soft October Sales

A composite of 101 Taiwan-listed OEMs (many with manufacturing in China) reported October sales slightly below the “busy season” trend line ( Chart 9 ). A 3/12 rate of change analysis ( Chart 10 ) reveals that near-term growth peaked at +36.7% in October 2007 and was +11.2% in October 2008 – its lowest level since 2001. Taiwan-listed ODM companies ( Chart 11 ) behaved similarly.

Motherboards ( Chart 12 ) were well off their normal pre-holiday season peak (consistent with Intel’s warning above). Display makers’ October revenues plunged ( Chart 13 ), as did those of DRAM producers ( Chart 14 ).

Taiwan chip foundries ( Chart 15 ) saw three successive months of sales declines, suggesting that global semiconductor shipments will soon plunge. Rigid printed circuit board makers ( Chart 16 ) had a large “bubble” in sales in the fall of 2007 but were down 4% on a 3/12 basis in August-September-October 2008 vs. the same months in 2007. Rigid copper clad laminate revenues by Taiwan-listed producers ( Chart 17 ) have plummeted.

Dr. Hayao Nakahara’s comments of Nov 1 ( Chart 18 ) shed light on the current SE Asian PCB situation.

“I am visiting Hong Kong after Taiwan and Vietnam. Visits and interviews with key PCB makers led me to conclude that some Asian big PCB makers started to see a decline of orders and shipments as early as September. Others remained robust until the end of October. However, with the exception of one maker, everyone I met said that their businesses are expected to deteriorate rapidly starting from November. There will be a seasonal upturn in early 3Q' 09, but the strength of upturn is expected to be rather weak.

As the business deteriorates price pressure begins to mount because some desperate makers cut prices to retain customers. Average 5 to 10% price reductions may be on the horizon. Selling price reductions and material cost reductions will force PCB makers to put pressure on laminate makers. So, the chain reaction will start.

Average capacity loading at PCB makers may be as low as 70%. Some makers are cutting their labor forces and will idle a production line or two to cut operation costs. For PCB makers, retaining cash reserve is very important. Therefore, they will minimize equipment purchases to a bare minimum for the next year. It will be a long, cold winter for equipment makers in 2009.”

Updated Forecasts

( Chart 19 ) is Custer Consulting Group’s updated global PCB sales model. It show revenue growth dropped to zero in September with a likely -5% in 4Q’08. ( Chart 20 and Chart 21) summarize Henderson Ventures’ “just-updated” forecasts for 2008 and 2009 global GDP, electronic equipment, PCB and semiconductor growth. See www.hendersonventures.com or e-mail Ed at hen.ven@Comcast.net for more details.