7/15/2010
By Carlos Guillen, Semiconductor Analyst

It is becoming clear that strong demand for PCs will certainly generate great opportunities for the semiconductor industry in 2010. As I have already stated before, I am very optimistic that the semiconductor industry will post yearly revenues that will come in much better than many expect. Strong demand for PCs in particular have held up very well during this just past June quarter and will likely continue to drive strong growth in semiconductor sales during the second half of this year, despite Euro and Chinese fears.

Financial results from Intel provided some support for the notion of continuing semiconductor industry revenue growth. Intel's second quarter revenue was simply phenomenal. Strong demand drove revenue to $10.8 billion, topping the Street's $10.3 billion estimate and management's $9.8 billion to $10.6 billion guidance range. Revenue was sequentially up 4.52 percent, but it should have been seasonally down by approximately 2%, so the result defied seasonality. More encouraging was that the better than expected revenue was fueled by continuing end-demand, particularly from enterprise. Moreover, channel inventories remained lean, and while Intel's inventories increased by approximately 12%, the increase was intentional in anticipation of strong demand during the second half of 2010. From a macro perspective, fears of a major slowdown coming from Europe and China did not quite materialize as many expected. In fact, revenues improved towards the end of the June quarter in Europe, and management is expecting a stronger second half of 2010 as opposed to a slowdown.

Revenue from AMD was also better than expected. Healthy demand drove revenue to $1.65 billion, increasing sequentially by 5.02% and beating both the Street's consensus estimate of $1.55 billion and management's own forecast of $1.50 billion to $1.57 billion. AMD's management also saw healthy sales in all regions and actually had some supply constraints in some of their products (i.e. GPUs and chipsets). More encouraging was that management expects seasonal revenues in the September quarter, up 7 to 8 percent despite slowdown fears in Europe and China.

Most recently, market research firm Gartner announced that worldwide PC unit shipments totaled 82.9 million units, increasing 20.7 percent from units shipped in the year-ago quarter and landing above Gartner's 19.3 percent growth forecast. The stronger than expected PC shipments were driven by ramping corporate replacements and by seasonal consumer demand. A higher level of replacements is expected to occur in the second half of 2010, driven by small and midsize businesses (SMB) and by large enterprises. It is important to note that consumer PC unit sales could have been higher, but slower growth of mini-notebooks unit sales attenuated overall growth. According to Gartner, it is apparent that the popularity of Apple's iPad temporarily cannibalized mini-notebooks, as well as consumer notebook sales to some degree. It should be noted that total PC unit shipments excludes the table category.

As it can be seen in the table below, HP continued to be the leader in worldwide PC unit shipments, with market share of 17.4 percent; however, its year-over-year growth lagged that of the industry, and its market share slipped a bit from the 18.8 percent achieved in the second quarter of 2009. HP continues facing some serious competition from Asian vendors; however, as the corporate sector strengthens, HP could regain some lost market share. On the other hand, while Asus had among the smallest market share at 5.2 percent, its PC units shipped increased by a whopping 78.5 percent and overall market share increased from the 4.8 percent posted a year ago. Asus strength has been in net-books launched two years ago, but they are also gaining strength in the traditional mobile PC market, which carry better margins.

Source: Gartner

Note: Data includes desk-based PCs and mobile PCs.

In general, I continue to believe that worldwide semiconductor revenue will grow at a stronger than expected pace in 2010. Despite fears of a slowdown coming from Europe and China, I see strong growth driven by a ramping corporate refresh cycle, which had been delayed and has gained potential. At the moment, I see minimal downside risk in terms of corporate spending and am much more optimistic about a sharp upturn in IT spending in the second half of 2010. I also see semiconductor revenue growth that will be driven by emerging markets where PC growth is in its early stages. Demand for internet access is also growing rapidly and should also serve as a growth catalyst. As such, I believe the semiconductor revenue momentum will continue, and I expect semiconductor revenue during 2010 to grow by 29 percent.

Carlos Guillen
Wall Street Strategies