Edgewater Research: Interconnect Digest - July 2023

Component Insights – July 2023

Important Disclosures in the Appendix

2H23 Outlook Down Again, 3Q23 Projected Down Q/Q; Pricing Showing First Signs of Softening

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Key Takeaways:

1. 2Q seen finishing down LSD Q/Q, relatively in-line; Weak demand seen culminating in aggressive actions by suppliers at QE.
2. 2H23 outlook down again M/M; 3Q/4Q seen down seq. on limited backlog support, muted bookings and inventory headwinds.
3. Pricing shows first signs of softening with suppliers running some QE deals, beginning to approve rebates/price protection to distis.

Top 3 Channel Comments:

• Demand feels incrementally weaker compared to 45 days ago. Distribution inventory is just not burning off as expected. This is because customer inventory is not burning as much. We see 2Q IP&E inventory in distribution finishing flat in aggregate. There were pockets of progress but that all got wiped out when suppliers came at the end of the quarter with deals pushing shipments to distis.
• In the end of June, TE and one other private supplier were very aggressive, coming up with deals urging us take on more inventory. TE in particular is coming up with an increased amount of excess of their Industrial product. In one deal TE gave us 60% higher than the typical discount at the end of the quarter to take on delivery.
• We don’t want to sound pessimistic but think if 2024 connector demand is flat to 2023 that will be a good outcome – this is how much inventory we think is out there across the supply chain and at customers.

Other Key Takeaways:

1. Inventory at distribution seen as flat Q/Q, and above targets due to softer POS and suppliers pushing product at quarter end.
2. End customers’ inventory digestion viewed as progressing slower than expected with further rebalancing expected throughout YE.
3. Backlogs seen as cleared, providing limited 2H support except in AD&M. Bookings seen flat/down Q/Q and 10-20% below billings.
4. Industrial (ex-Energy/Medical) demand seen softening into 2H on pushouts and weak orders from automation and core customers.
5. Auto feedback unchanged; 2H demand seen more muted with moderation in ICE, continued strength in EVs. UAW strike still a risk.
6. IT datacom projected up slightly in 3Q with AI shipments seen offset by incremental weakness in traditional server/networking/telco.
7. CE/Mobile demand seen as weak into 2H on continued inventory digestion by OEMs/Apple. AD&M demand still robust.
8. Several Tier 1 suppliers seen as more aggressive than usual at QE, pushing products to customers/distis and offering deals/rebates.
9. A tier 1 supplier is seen rolling back cost savings measures, after relaxing them earlier in the year, due to weakening outlook; no headcount cuts

Conclusion:

Interconnect fundamentals remain challenged and the outlook for 2H23 continues to deteriorate on elevated inventory, a slower recovery in end demand (outside AI/ADM) and some instances of increased pricing pressures entering the industry. More concerning is outlooks for 2024 appear to be moderating, with some forecasts now calling for flat to potentially down in 2024. While the nearterm outlook is likely to remain under pressure, we still continue to believe the long-term outlook of 5-6% growth remains on continued growth in AI and EV in particular. 

APPENDIX

We, Kevin Rottinghaus, Sean Muir, Dennis Reed, and Nik Todorov hereby certify that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities referred to in this research report.  We certify that no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.  The analyst(s) responsible for the preparation of this report have no ownership stake in this company.  Edgewater Research Company provides no investment banking services on this or any company. Proprietary research and information contained within which forms the basis for findings or opinions expressed by Edgewater Research Company may be used by Edgewater Research Company for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted by this email is intended solely for the person or entity to which it is addressed. If you are not the intended recipient of this message, be aware that any use, review, retransmission, distribution, reproduction, or any action taken in reliance upon this message is strictly prohibited. If you received this in error, please contact the sender and remove the material.