Want to know what's ahead for the rest of the year? Stay alert for the March quarter results. They will tell us how the various industry players performed at the beginning of the year. More significantly for a market still in turmoil, they will provide some insights into what we can expect for the second half of the year.
If you are an OEM, the numbers will help you determine how your suppliers are faring, their relative financial strengths and weaknesses, a product roadmap, and the competitive position. Component suppliers can use information from first-quarter financial filings and comments by corporate bosses to rate customers and determine what level of resources to devote to individual partners.
The market is in flux, and I believe we can all use deeper insights into market conditions. However, the general environment isn't quite that easy to read. How do you rate the tablet market, where a single company -- Apple Inc. (Nasdaq: AAPL) -- has a marketshare of more than two-thirds? This domainance may be perfect for Apple suppliers, but it presents a bit of a conundrum for those supplying products to the likes of Asus, Dell, Motorola Mobility, Nokia, and Samsung, all of which are jostling for crumbs.
You may know how your company performed in the first quarter, but the big picture is even more important in such an interwoven market. To understand what lies ahead for the industry, I would be looking for information in five critical areas as companies announce their results:
Sales growth from a year earlier.
For many companies, this growth (as opposed to growth from the previous quarter) wasn't that great in the December quarter. Expectations were for strong growth in the final quarter of 2011 and continued improvement in the first quarter of 2012. The fourth-quarter results disappointed, and it's not clear how robust sales were in the first quarter. Some companies lucky to get their products designed into iPads and iPhones are experiencing gangbuster sales. Others will report piddling improvements. If there's sales growth happening, it's not spread evenly across the industry, and that is a concern. However, sources tell me some companies in the semiconductor market will report strong sales.
The high-tech market is still a very highly margin-sensitive sector. Component commoditization and price erosion are nibbling away steadily at corporate profits. So far, pricing hasn't been a problem, because the demand-supply situation has been very steady and has even moved more toward a state of equilibrium. Component suppliers are taking the brunt of most price pressures. Not even the March 2011 earthquake in Japan and the flooding in Thailand late in the year shifted pricing in any significant manner toward suppliers.
If margins remain steady, the industry is most likely to be in a reasonably balanced condition for the second half of the year. OEMs are in the driver's seat for now in pricing, but any other natural disaster or a sharp upswing in demand could swing the pendulum away from them.
I love watching the inventory ticker, and so should you. It speaks to the past but foretells the future. If inventory levels are low and demand is kicking in, companies can be expected to ramp up manufacturing. A rise in stocks could tamp down production. However, some companies purposely build inventory ahead of a product introduction. Apple's inventory shot up in the quarter that ended Dec. 31 to $1.2 billion ahead of the debut of the new iPad. Its inventory should be lower for the March quarter.
For the supply base, a rise in inventory at the end of March probably indicates slowing sales. We should also pay close attention to inventories at component distributors. These companies, especially the industry leaders, have extensive parts management expertise, and the direction of their inventory (up or down) can help suppliers understand the demand environment.
Variance in individual company results.
There's Apple, and then there are all the others. In the high-tech sector, the group of winners is very small, and the number of average performers has been growing. Some companies will post great first-quarter results. Others will continue to trundle along in barely-surviving mode. This is important, because it means analysts and industry observers cannot make any long-term generalizations based on the performance of leaders or any other group. As you contemplate the results of a particular company, remember that it most likely isn't representative of the industry.
Cash is still king, but is it growing? The electronics industry has been awash in cash for quite a while. Concerns about the global economy and tight lending conditions have driven high-tech companies and many others to build up a mountain of cash. This also reflects a cautionary attitude toward spending -- capital expenditure projects have been severely constrained. However, if the cash heap isn't growing as quickly as it has been these last few years (ignore Apple's experience, which is an anomaly), then either demand is trending down, or companies are at last beginning to spend more on projects they expect to increase sales. Determining exactly what's going on could be tricky but not impossible.
My final suggestion: Don't obsess over the first-quarter results. The sales and profit numbers aren't as important as what is on the balance sheet. A boatload of cash, average inventory, and limited debts are more important than gangbuster sales. What executives have to say about the current and upcoming quarters is also more significant than their relative position in the quarter that just ended. You don't win a race by looking only in the rearview mirror. Whatever's there is already behind you. Why worry about it?
Jay, You are right. That's why we compare year-over-year quarter results first before looking at sequential performance. In this case, we'll be juxtaposing first quarter 2012 with first quarter 2011. Then we'll watch for what the CFO & CEO have to say about the second quarter. Many of these companies already have an idea as to how the second quarter will look like simply by looking at the orders coming in and the percentage of this that customers accept and actually pay for.
Still, I wouldn't accept the word of anyone telling me they know anything beyond 90 days. Nobody does and even if they can guess how the market will fare in the second half, any wind (favorable or unfavorable) can blow in and alter the forecast completely.
While the first quarter numbers are a great indicator when compared to previous years numbers, they can also paint a different picture. Q1 sales could be up because many companies had a slow Q4 or were sitting on inventory. When the new quarter started they might of been able to pick up sales. I think in some instances Q2 results will give a better feel for how the year is being projected.
Barbara, still that imbalance is in HDD market. Now also the supply is less when compare with demand in most of the Asian countries. Moreover, the pricing are at higher end and I think with in another 6-9 months’ supply and demand can be get balanced.
It can hardly be fun watching inventory numbers when you can't get the supplies you need. One of the more intriguing issues in the electronics industry today is the what I see as our increasingly connected components world where all suppliers often find themselves dependent on rivals for sales growth. In other words, if your supplier isn't selling you may not be selling either because the OEMs need all the components and not just your part.
March is also considered the quarter that the impact of the natural disasters of last year should finally abate. I'm not sure if HDDs supply/demand are back in balance, but as you say, the inventory ticker is always fun to watch (unless you can't get the inventory you need.)
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