Semiconductors: Seeing the Light at the End of the Tunnel?

The SEMI trade group has released the February 2009 Book-to-Bill Report for North America-based manufacturers of semiconductor equipment. Rather than list the numbers in detail, we'll just present the charts below (values in millions of dollars, February numbers are preliminary).

Before digging into the numbers, I expected to write another post on how the semiconductor equipment sector was crashing even further. But maybe we can say there's light at the end of the tunnel.

This first chart shows that billings in dollar terms are decreasing and, of course, that is bad. Bookings, however, now seem to be decreasing at a much slower rate; they are down only 5% month-over-month. This might not sound that great but from November to December 2008 bookings dropped 26% and from December 2008 to January 2009, they dropped over 52% so this is very welcome reduction in the rate of decline.

Bookings comprise the forward-looking aspect for the industry, similar to new orders. The indication now, after the huge drops seen in previous months, is that in the near term maybe things won't be getting too much worse.


This is not to make light of the fact that both bookings and billings are at historic low levels, the worst since SEMI started keeping records. Furthermore, the numbers for January have been revised downward and February 2009 is 78% worse than the previous year. Still, the downward momentum has begun to slow and that is good news for the industry.

Further suggesting that a bottom might be in sight is the Book-to-Bill ratio. The following chart shows that Book-to-Bill stopped falling in February and actually moved up though only very slightly. After the devastation registered thus far in this sector, even a slight positive becomes a welcome sign.


Conclusion

There's no great rush to go out and buy the big names in this sector such as Applied Materials (AMAT), KLA-Tencor (KLAC) or Lam Research (LRCX). Capacity utilization is low, margins are compressed, sales are at multi-year lows.

Nevertheless, February's numbers might show that the sector is engaged in a "bottoming process". Could things get worse? Possibly. Do two months make a trend? Possibly not. But this is the best news the sector has had in months. Given the current levels of bookings and billings, that is somewhat of a sad statement. But for tech investors, this may represent a whiff of hope.

Disclosure: no positions in any stocks mentioned

Comments

[Silicon Inv...:]

A BTB of .48, even if orders stabilize at current levels, means that revenue will fall by a half in future quarters. The question for investors is which companies can adjust costs to the lower revenue stream and maintain their cash levels on the balance sheet. Management's conviction that revenue levels have hit a sustainable bottom and management's ability to operate at that level without much negative cash flow, will trigger stock price improvement.

Mar 22 10:51 AM

[andy93109:]

I've been in Semi for 15 yrs. I think I might offer some advice for investors here:

Stop worrying about BTB ratios being so low. The explanation isn't a 50% drop in demand! No recession could slow real chip demand to half. In late spring of 08' with demand slowing, manufacturers (cars, computer, aerospace, instruments, consumer electronics, etc.) looked at chip inventory and decided to reduce their exposure and stopped ordering from their supply chain for a quarter or so. The distributors then saw their orders drop and cut back orders to the Semi Mfgs. Each of the suppliers in the chain (mfg, distributor, OEM) reduced their pricing to move inventory and those two things together created the abysmal BTB ratio.

Within another quarter, the chip glut will have moved itself through the slow-but-not-dead chip sale supply chain and the whole thing will turn right back on. When it turns on, it will be fast too, because it hasn't been this artificially slow, ever. By the end of the year there will be irrational investor exuberance again...ahh.

Mar 23 07:39 AM