Semiconductor Infrastructure: KLA-Tencor, Novellus, Amkor

Let’s do a quick roundup of the semiconductor infrastructure sector.

KLA-Tencor, (NASDAQ: KLAC) the world leader in yield management and process control solutions for semiconductor manufacturing and related industries, announced Q2 results on January 29. Though the company managed to exceed the Street’s expectations on revenue, it fell short in its EPS figures.

Revenue of $397 million for the quarter was higher than the Street’s expectations of $394 million and represented a 26% reduction over the year. The loss of $0.12 per share was significantly higher than the market’s expectations of a loss of $0.07 per share. The previous year, KLA recorded earnings of $0.75 per share.

By region, the U.S. contributed 64% of new orders while Japan followed with 22%. Europe brought in 7%, Taiwan 3%, and the rest of Asia 4%. There was no order contribution from Korea this quarter compared with a 13% contribution last quarter.

By segment, wafer inspection contributed 22% of total revenues. Reticle inspection contributed 8%, metrology 15%, solar, storage, high-brightness LED and other non-semi was approximately 7%, and service revenue was 48%.

KLA blamed the drop in revenue on the steep reductions imposed by its customers on capital spending, which resulted in factory shutdowns across its end markets and geographies. Customers accelerated plans to cut costs, conserve cash and scale back investment plans to reduce factory utilization throughout the quarter.

KLA expects orders to be flat compared with December, with revenue of $280-$320 million in Q3 and non-GAAP loss of $0.20-$0.35 per share.

KLA is currently the market leader in 22 of the 24 markets it serves. The company will strive to ensure that it maintains this leadership despite the poor economy. Also, in a negative growth industry, the company is looking to grow faster than the industry. This won’t be easy.

Its cost control measures are already in place and the company expects to see a benefit of $140-$145 million per quarter.

Following the results announcement, the stock rose 5% to $20.04. At the time of writing, the stock was trading at $18.07 with a market capitalization of $3.3 billion.

KLA still performed better than its peers, primarily due to its presence in segments such as inspection and metrology, which ensures that customers buy its tools even in recessions. On February 4, Novellus Systems (NASDAQ: NVLS), another semiconductor infrastructure player, announced its Q4 results, which were a bigger shock.

Quarterly revenue fell 48% to $188.5 million, marginally shy of the market’s expectations of $189 million. The company reported a loss of $0.21 per share compared with the market’s estimate of $0.16 loss per share. For the year, the company closed revenue at $1.0 billion with EPS of $0.07.

By region, the U.S. contributed 43% of revenue, followed by Europe at 16%, China at 15%, Japan at 14% and Korea at 12%.

During the quarter, Novellus repurchased 1.3 million shares for $19.2 million at an average price of $14.41. The company had to record a $99.5 million write-off on the impairment of acquisitions that were turned into the Industrial Applications Group.

Novellus has adopted a two-pronged approach of controlling costs and streamlining its R&D programs in response to the weak market. The company is strengthening those measures through selected headcount reductions, consolidating facilities in San Jose, shedding excess real estate, cutting executive pay and initiating company-wide shutdowns for two weeks in the first quarter.

The company gave a dismal outlook, a reflection of the sad state of the industry. It expects revenues to be down 41%-49% to be in the range of $95-$110 million, with loss per share in the range of $0.45-$0.60.

CEO Rick Hill qualified a “fundamental change” to the industry as one of an absence of subsidized capital to sustain unprofitable business models. He said that the semiconductor industry is driven by two major segments: IT infrastructure development and consumer electronics. The semiconductor industry is feeling the heat on account of both segments’ having cut expenses. The company doesn’t see any improvement in conditions in the near future and are preparing for the worst.

The stock fell to $13.77 after the results announcement and at the time of writing was currently trading at $12.80.

Another player, Amkor Technology, Inc (NASDAQ: AMKR), is facing similar troubles. With revenue of $549 million, the company exceeded the market’s expectations of $546 million even though the company reported a 24% sequential decline for the quarter. But it also reported a loss of $0.03 per share compared with the previous year’s EPS of $0.46. The company ended the year with revenue of $2.66 billion from $2.74 billion in 2007. For the year, EPS dropped 48% to $0.59, from $1.14 a year ago.

Amkor is no different from its competitors and is troubled by serious recessionary and industry pressures. Like others, the company is trying to alleviate these pressures with cost control measures such as headcount reduction, executive pay cuts, consolidation of facilities and shutting down and disposing of excess real estate. The company expects a benefit of $22 million in the first quarter from these measures.

The stock has been trading around $2.60 with a market capitalization of $483 million.

Disclosure: None

Comments

[ringy:]

"KLA still performed better than its peers, primarily due to its presence in segments such as inspection and metrology, which ensures that customers buy its tools even in recessions" - really??? Not true. Inspection and metrology are almost discretionary compared to process tools. You missed it completely. What saved their hiney was service revenue - 48% - leverage of their installed base.

Feb 19 07:49 AM

[User 20796:]

KLAC is in a world of hurt. Their highest margin business, reticle inspection, is under attack by Applied Materials. Intel's move to 32nm this year in Oregon, NM, and AZ pretty much assures that AMAT keeps all that reticle business that they won from KLAC last year. I seriously doubt if there is enough time for KLAC to win it back.

So much for the sell-side theory that KLAC will only lose 8-9 total orders in that space.

And on that bookings breakdown mentioned by Ringy, here are the real numbers:

$243 million total bookings
$28 million was holdover from prior quarter
$215 million Net booking
$103 million of the Net was Service
$112 million is the actual tool bookings
$84 million is semi tool bookings (25% was non-semi related equipment)

Current expenses (after RIF) set break even at revenue rate of $350-400 million/quarter (??)

Ummm... Now that your new run rate is under $250 million how do you cut an additional 25-35%? Of course, when you read the transcript you will find that nobody asked that question in a meaningful way.

Carl

Feb 19 02:46 PM