Mr. Smigie: I cover the analog and discrete sectors of the semiconductor industry. So for the most, part my comments will be specific to these segments. Semiconductors are at the back end of the supply chain. So as demand slows for products at the front end of the supply chain - such as computers, cars, telecom equipment, factory automation, washing machines, what have you - semiconductor companies usually experience a more severe decline. And particularly for the companies I cover, as much as 50% to 70% of their revenues might go through a distributor, like Arrow (ARW) or Avnet (AVT). So as demand at the original equipment manufacturer level (OEM) slows, the OEMs start reducing semiconductor orders along with reductions in their own internal inventory. Additionally, channel distributors such as Arrow and Avnet start reducing their inventory levels. So as demand falls and orders stop coming in, semiconductor companies have to reduce OEM and channel inventory, as well as their own inventory. So the drop in sales is magnified by the need to work down the OEM and channel inventory. We've seen a lot of this in my space over the last 10 months or so. My companies were particularly hard hit because they make significantly more use of the channel than a company like Intel (INTC), for example. I don't know Intel's specific distribution channel usage, but I suspect it's not very large. Companies that use a more direct sales model are probably less affected by the drop in demand. A 10% to 15% drop in OEM sales equates to about a 40% drop in revenues for my companies. This can be pretty devastating. Last year, they were forced to cut more than 25% of their workforces - mostly factory workers. Some of the fabless analog players fared a little better than the discrete guys and the more manufacturing-intensive analog guys. For many of the analog companies, the design function is a little more critical than the manufacturing function, which allows them to outsource the manufacturing function. So for the analog guys who are fabless, while their sales declined as much as the others, they didn't necessarily see as big of an impact on their margins. Usually the discrete manufacturers that rely heavily on the factories, such as Diodes (DIOD), ON Semiconductor (ONNN) and Fairchild (FCS), have to reduce workforces significantly and shut down factories in order to take capacity offline.
Tickers included in this excerpt: DIOD, FCS, ONNN
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