With second quarter earnings reports hitting soon, some of the biggest names in semiconductor production will show the world just how much international trade and tariff wrangling matters.
It won’t just be how companies have fared in the second quarter, but what the earnings outlook might be for 2020 and beyond. Chip revenues have been down globally for five months and semiconductor manufacturing equipment sales are expected to be down more than 18% for all of 2019.
Samsung, the world’s biggest maker of memory chips and second in overall semiconductor sales, recently estimated it would see a 55% drop in second quarter profits. Analysts said it was partly due to a decline in memory chips used in smartphones and data centers. A surplus of DRAM and NAND has dragged down the price of computer memory as well.
Broadcom forecast a $2 billion fiscal year revenue hit in mid-June over uncertainty surrounding U.S.-China trade tensions and the Huawei export ban. CEO Hoc Tan at the time said customers were actively reducing inventory levels to manage risks.
Since that time, U.S. President Donald Trump has said some companies will still be able to do business with Huawei provided the products don’t pose a national security risk. However, it isn’t clear how or when trade talks over tariffs will help—or hurt—company financials.
Meanwhile, Tan has sought to diversify and was in negotiations to buy a software company, either Symantec or Tibco. The success of the acquisition of software maker CA last year has boosted Broadcom revenues. However, the Symantec deal appeared to be dead earlier this week.
If some semiconductor companies are resigned to a less-than-satisfactory second quarter, perhaps the second half 2019 or all of 2020 will show some uptick.
That’s not what some analysts think, however.
For example, UBS Global on Monday said in a research note that the recovery for memory capital expenditures remains “elusive.” Samsung may offer a bright spot for 2020, however, UBS said.
“We see few indications of a material recovery in wafer fabrication equipment (WFE) spending in second half 2019 or even first half 2020, and we are cutting estimates for Applied Materials, Lam Research Corp. and Teradyne,” UBS said.
UBS cut its earlier market forecast of $50 billion for 2020 for WFE, including DRAM, NAND, and Logic chips, to $46.5 billion. Total capital spending was forecast to be $94.5 billion in 2020, down from nearly $102 billion in an earlier forecast.
Samsung could remain aggressive in capex (capital expenditure), while other vendors “will be very slow to ramp capex back up,” UBS wrote. The company’s general assumption is that “memory revenue grows only modestly year over year in 2020.”
On the bright side, UBS said that spending for logic chips “still remains solid due in part to a big 7 nm push by Samsung” and the possibility that Intel will outsource a “very significant portion of wafer capacity as 10 nm yields remain less than 50%."