4Q02 Update: Data Processing Forecast Scenarios,

Transcription

1 Forecast Analysis 4Q02 Update: Data Processing Forecast Scenarios, Abstract: Financial releases by publicly traded suppliers indicate a challenging market environment will be a year of recovery. By Joseph Byrne Strategic Forecast Statement Gartner Dataquest expects the market for semiconductors for data processing use to be $64 billion in 2002 and to grow 11 percent to $71 billion in Publication Date:November 21, 2002

2 2 4Q02 Update: Data Processing Forecast Scenarios, Overview In the face of continuing economic uncertainty, Gartner Dataquest has developed three forecast scenarios for the data processing sector of the semiconductor market. These are best case, most likely and worst case. We present the scenarios in this Perspective. Additionally, we discuss the performance of computer component suppliers during the most recently passed quarter. Forecast Accelerators and Inhibitors End Demand Demand for data processing equipment affects semiconductor shipments. General worldwide economic concerns and company profitability are depressing demand for IT. Further, they may depress retail sales during the holiday season in some regions. The Conference Board (a U.S.-based economic analysis organization) reports that U.S. consumer confidence is at the lowest levels since However, Gartner Dataquest is unaware of a strong tie between confidence and actual spending. The timing of economic recovery is always uncertain. The ongoing potential of a U.S.- Iraq war exacerbates the uncertainty. The most likely case is that sustained economic recovery will begin in the first half of 2003 in the United States and propagate thereafter to other countries. Increased enterprise and consumer IT spending will follow. However, market saturation also confounds growth. The PC market is increasingly saturated, leaving only a replacement market. Performancedriven replacements are less compelling because even older PCs are sufficient for most workloads. Feature-driven and ownership-cost-driven upgrades may also drive replacements. The Gartner Dataquest Perspective "4Q02 Update: Global PC Forecast Scenarios, " (HARD-WW-DP- 0382) provides more information about the drivers and inhibitors of the PC market. Pricing In addition to end demand, component pricing is an important swing factor. The semiconductor industry is coping with a generous supply of production capacity, weak demand, and inventory and product mix issues. Consequently, prices are uncertain and prone to drift lower in the short term. In the long term, semiconductor product integration and falling computer prices further depress prices.

3 In the microprocessor market, Intel is maintaining its lead in the megahertz race during the fourth quarter of The company is also underutilizing its production capacity. Therefore, the company is in a position to lower prices to stimulate demand and also capture market share. AMD has struggled during recent quarters with flushing the channel of older, slower processors and ramping production of newer, faster processors. These issues have eroded AMD's average selling price for processors. Further, AMD is struggling to maintain its positioning of the Athlon line against the Pentium rather than the lower-priced Celeron. The pricing environment cannot improve unless demand and product differentiation increase. In 2003, Intel will seek to stoke demand and support pricing in the mobile market with the Banias product line and in the desktop market with Hyper-Threading. AMD will launch its family of 64-bit processors to improve its market positioning and pricing. Valiant as these efforts are, however, lengthening upgrade cycles and falling PC prices conspire against microprocessor suppliers. Pricing will be depressed in other component markets too. In the DRAM market, product mix issues between double data rate (DDR) and synchronous dynamic random-access memory (SDRAM) will be resolved in the beginning of Until the third quarter of 2003, however, the industry will be oversupplied, depressing prices. Graphics processor pricing is likely to suffer from revived competition between NVIDIA and ATI. Prices will gain support, but at the expense of unit shipments, by the adoption of core logic integrating graphics capability, which will obviate the low end of the market. Conversely, integrated graphics will add value to core logic, supporting prices. However, suppliers of Intel-compatible core logic exist at the whim of Intel. Intel may price its own products to gain share, support corporate revenue targets and increase fab utilization. Suppliers of AMD-compatible core logic stand to suffer chipset price erosion because AMD has integrated the northbridge (the set of interfaces connecting a microprocessor to main memory, a graphics subsystem and a peripheral subsystem) with its forthcoming 64-bit microprocessors. 3 Forecast Scenario Commentary 2002 The market for semiconductors for data processing use is likely to grow approximately 4 percent in Growth in the DRAM market will offset lackluster performance in other product markets. The market has fared poorly because of weak demand for end equipment and soft pricing. The fourth quarter will grow sequentially because of seasonal variations in shipments.

4 4 4Q02 Update: Data Processing Forecast Scenarios, In 2003 and beyond, the dominant factors affecting the forecast are the semiconductor market cycle, lengthening product life cycles in the computer segment and falling system prices. Growth will be strong in 2003 because the semiconductor market, particularly DRAM, will be on the upswing, and end system demand will recover along with the overall economy (see Tables 1 through 3). Table 1 Worldwide Forecast of Semiconductors for Data Processing Use (Millions of Dollars) 1Q02 2Q02 3Q02 4Q Best Case 16, , , , ,217.2 Most Likely Case 16, , , , ,730.4 Worst Case 16, , , , , Q03 2Q03 3Q03 4Q Best Case 16, , , , ,210.8 Most Likely Case 15, , , , ,711.5 Worst Case 13, , , , ,534.6 Source: Gartner Dataquest (November 2002) Table 2 Worldwide Forecast of Semiconductors for Data Processing Use, Sequential Growth (Percent) 1Q02 2Q02 3Q02 4Q Best Case Most Likely Case Worst Case Q03 2Q03 3Q03 4Q Best Case Most Likely Case Worst Case Source: Gartner Dataquest (November 2002) Table 3 Worldwide Forecast of Semiconductors for Data Processing Use, Year-Over-Year Growth (Percent) 1Q03 2Q03 3Q03 4Q Best Case Most Likely Case Worst Case Source: Gartner Dataquest (November 2002)

5 5 Quarter in Review: Computer Semiconductor Supplier Results As a whole, revenue in the third quarter was relatively flat for suppliers of logic components for computers. Table 4 lists revenue for a representative set of suppliers. The largest supplier, Intel, has posted revenue in 2002 consistent with typical seasonal patterns sequential declines in the first and second quarters followed by growth in the third quarter. Intel's guidance for the fourth quarter is for revenue in a range below or at a typical seasonal pattern. Additional information about Intel and other suppliers is provided. Table 4 Quarterly Revenue for Representative Suppliers (Millions of Dollars) Vendor 1Q02 2Q02 3Q02 Intel (Intel Architecture Business) 5,768 52,13 5,407 AMD (PC Processor Sales) NVIDIA (Excluding Xbox) ATI Technologies (Chips and Boards) VIA Technologies Silicon Integrated Systems ALi NVIDIA's fiscal quarters end in April, July, October and January. 2 ATI's fiscal quarters end in February, May, August and November. Source: Gartner Dataquest (November 2002) Intel Although average prices sagged during the quarter, unit shipments of microprocessors and chipsets grew sequentially. The net result is that the Intel Architecture business unit increased its revenue approximately 4 percent. With respect to products, Intel released a routine set of upgrades to its core logic and PC processor line. For the desktop PC market, the company announced that the forthcoming 3.06GHz desktop Pentium 4 will include Hyper-Threading Technology, Intel's brand name for simultaneous multithreading. Essentially, the technology allows one microprocessor's computing resources to be organized such that they appear to software as two separate microprocessors. The net benefit of the technology remains to be seen; the technology appears promising in demonstrations by Intel. The most likely benefit is that computers running resource-hogging software will appear livelier to users. For the mobile market, Intel announced that wireless LAN capability will be part of its forthcoming Banias mobile PC platform and that it has begun sampling its own wireless LAN products. Gartner Dataquest expects Banias-based PCs to launch with wireless LAN built in, using technology from either Intel or other suppliers.

6 6 4Q02 Update: Data Processing Forecast Scenarios, AMD PC processor sales plummeted 31 percent to $262 million; unit shipments fell too. The company reports that sell-through actually increased, however. Actions to adjust the mix and value of inventory in the channel reduced recognized revenue. As is typical, several processor upgrades were released during the quarter. Ramp of the Athlon product was less than planned, casting doubt on AMD's capability to maintain its position in the performance race. AMD expects to regain its footing during the fourth quarter of 2002 and then in the first half of 2003 when the next 32-bit design, Barton, and AMD's 64-bit family, Hammer, are released. During the quarter, AMD made several announcements regarding thirdparty support for the 64-bit family. NVIDIA For the quarter ending in October 2002, NVIDIA increased revenue approximately 14 percent, excluding sales of products for Microsoft's Xbox. The company believes that it is gaining share in the mobile and core logic sectors. During the quarter, the company introduced products upgraded to support AGP-8X and began production of nforce2 core logic chipsets, which support AMD processors with interfaces up to 333MHz, AGP-8X and DDR-333. The nforce family only supports AMD microprocessors; some models include an integrated high-performance graphics processor. Conspicuous by its absence was an all-new graphics core. NVIDIA is likely to launch its next-generation core, the NV30, at Comdex in November. Meanwhile, competitor ATI Technologies is faring well in the performance desktop category. ATI Technologies ATI Technologies mounted a resurgence in the desktop graphics segment in the third quarter of 2002 by shipping its Radeon 9xxx family of products. With the product, ATI gained the lead in 3-D performance. ATI has deployed the 9xxx series core in desktop, mobile and TV/video card products. The company also began shipping core logic chipsets with integrated graphics. ATI offers chipsets for use with both Intel and AMD microprocessors. For the quarter ending 31 August, ATI Technologies reported a sequential revenue decline, which the company attributed to a weaker market for notebook PCs. It is also coincident with NVIDIA gaining share in the mobile market. The new 9xxx family of products and integrated chipsets will drive near-term growth.

7 Gartner Dataquest Perspective VIA Technologies VIA Technologies launched the Apollo KT400 core logic chipset during the third quarter of The chipset supports DDR-333 and AGP-8X; it works with AMD microprocessors with interfaces up to 266MHz. The company also launched audio controller products. Also during the quarter, Wal- Mart began shipping a $200 PC based on VIA's microprocessor and core logic. Silicon Integrated Systems Silicon Integrated Systems increased revenue for the quarter by 27 percent sequentially. New products introduced include the SISR658 core logic chipset that supports AGP-8X and 1066MHz Rambus Dynamic Random Access Memory (RDRAM). With the exception of storage networking, data processing is a relatively mature product market for semiconductors. However, the market remains dynamic, albeit more challenging. Well after consolidation in the 3-D graphics accelerator market has passed, competition is still fierce, and innovation is a driving force. Even in the staid core logic market, integrated graphics is having a major effect. It is diminishing the opportunity for add-in graphics acceleration and stands to change the basis of competition to favor companies with strengths in graphics. Consequently, it has driven ATI and NVIDIA to enter the market. In the microprocessor market, 2003 will be an exciting year with the debut of AMD's 64-bit processors with the integrated northbridge and Intel's Banias and Hyper-Threading-enabled products. During 2002, the value of strong operations management has become clear. Companies have had to aggressively manage channel inventory in light of soft demand. The ability or inability to ramp new products has affected companies' market share, average selling prices and market capitalization. Because the market is mature, yet dynamic, strong operations management will continue to be a requisite skill. Gartner Dataquest Recommendations Suppliers need to continue to focus on operational efficiency from the design through fulfillment processes. In light of a lengthening upgrade cycle, suppliers need to focus product development on features that provide better customer productivity or that reduce costs. Companies should expect an economic recovery in the United States to become manifest in the second quarter of Increased spending on information technology should follow. 7 Key Issue What is the size and projected growth of the key application market segments?

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