Semiconductor Capital Equipment Sees a Recovery

By Carlos Guillen

So far, signs from the semiconductor capital equipment industry continue to be favorable, indicating that a recovery in the semiconductor industry is well on its way.

In August, we were very encouraged with Applied Materials’ (AMAT) fiscal third quarter financial performance, as we saw better-than-expected results across the board; revenue, margins, and earnings per share were all certainly better than we expected. We were also very impressed with KLA-Tencore’s (KLAC) fourth fiscal quarter earnings results, as gross margin and new orders rose sharply. It was encouraging that management acknowledged that the business environment had stabilized and visibility had improved. Most recently Kulicke and Soffa Industries (KLIC) provided rather positive news, as management now expects its September quarter revenue to come in stronger than previously anticipated. In the company’s June quarter earnings release, management guided revenue to be in the range of $85 million to $90 million, representing a sequential increase of 68.0% to the midpoint of the guidance range. Now, KLIC’s revenue is expected to be in the range of $100 million to $105 million, representing a sequential increase of 96.8% to the midpoint of the guidance range.

Corroborating the notion that a recovery in the semiconductor industry is well on its way, according to data from SEMI, bookings continued to trend higher for the fifth consecutive month, and billings ramped up for the fourth consecutive month. The book-to-bill ratio also remained above parity, although it declined a bit as billings grew faster than bookings. In essence, it’s all “systems go” for the semiconductor industry as we now believe that end-demand is now becoming a stronger component of the recovery.

Given the most recent data from SEMI, the trailing three-month average billings in August totaled $580 million. This monthly result increased approximately 7.79% from the level achieved in the prior month, although it still represented a 45.5% drop from the level achieved in August 2008. Given the strong momentum in billings during the past two months, we expect to see third quarter billings to rise sequentially by 37.5%. We are also estimating American billings for 2009 to total $6.85 billion, contracting 44.4% from the $12.3 billion achieved in 2008.

The three month average bookings for August totaled $599 million. Although this monthly result declined 30.9% from that of August 2008, it continued to rise sequentially, increasing by 4.76% and providing more support that a semiconductor recovery is well on its way. We continue to expect very limited downside risk to bookings; in fact, given that bookings are still at significantly low levels, expect a bookings recovery for the rest of this year. We are forecasting American booking in 2009 to total $5.98 billion, contracting 40.2% from the $9.99 billion achieved in 2008. For the September quarter, we expect bookings to total $1.84 billion, contracting by 5.41% from bookings in the year-ago quarter, but increasing by 74.8% from bookings in the June quarter.

In August, the overall book-to-bill ratio continued at above parity for the second consecutive month, although it decreased to 1.03 from the 1.06 level reached in July. The slight decrease in this ratio reflects the fact that billings increased at a stronger pace than bookings. We expect the September quarter to end with a book-to-bill ratio of 1.02, compared to the June quarter figure of 0.80, as bookings during the quarter should continue to increase faster than billings. While we expect to see gradual book-to-bill improvements on a quarterly basis, we anticipate 2009 will end with a book-to-bill level at roughly the same level as that achieved in 2008, a total yearly bookings to decrease at approximately the same rate as that of billings.

It is becoming apparent that, although the macroeconomic backdrop is still worsening, it’s doing so at a decreasing rate that is shrinking faster than previously anticipated. As a result, many OEMs and distributors have continued to replenish significantly depleted inventories in anticipation of better than expected end demand. However, many companies are already seeing improvements in end-demand, so it is not just inventory restocking that is driving semiconductor company revenues. The fact that manufacturers and distributors have been very careful in managing inventories provides support for the notion that end-demand is indeed contributing to the rise in revenues.

We expect that the combination of stock replenishment and end-demand improvement will continue to push semiconductor industry utilization rates higher for the next several quarters, increasing the likelihood of industry capacity expansion, which will ultimately benefit semiconductor equipment providers. As it stands, many flat panel display players are already operating at rather high capacity levels, and global LCD unit demand should be over 20% by the end of 2009, with most of the strength coming from the U.S. and China. Moreover, the memory market continues to improve, and while memory manufacturers may not necessarily be planning on significantly expanding current manufacturing capacity, we expect them to increase technology buys in order to remain competitive once the macroeconomic backdrop begins to recover.

We believe the industry’s transition to DDR3 DRAM will continue to gain momentum in 2010 as no one will want to be left behind the curve in terms of new technology, and this will certainly provide a strong component of revenue growth for the semiconductor equipment industry. In addition, smaller NAND Flash nodes will also drive revenue growth. As such, we expect capacity expansion to be the significant revenue driver for semiconductor capital equipment players in 2010.