2011 Semiconductor Equipment Revenue Growth Slow But Looking Better

Jan.26.11 | About: VanEck Vectors (SMH)

by Carlos Guillan

Taking a look back at 2010, I can see that the semiconductor capital equipment industry demonstrated phenomenal growth, indeed much better than many expected. In fact, according to data from SEMI, semiconductor capital equipment revenue in North America increased by a whopping 147 percent during 2010, which was nicely above my expected growth rate of 139 percent. This certainly raises the bar beyond reach in 2011; however, I still expect to see modest growth this year.

SEMI's most recent data showed that billings ticked higher in December after making a small dip in November. This result was quite a nice surprise, as I was expecting a continuing decline into the end of the year. The trailing three-month average billings in December totaled $1.7 billion. This monthly result increased approximately 8.74 percent from the level achieved in the prior month, and it still represented an increase of 100 percent from the year-ago level. While I had become more bullish that December would be stronger than I had expected, the result was better than that, making the full year revenue land much higher than I had forecasted.

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Also surprising was that bookings made a nice reversal in December. After four consecutive months of month-to-month declines, the three-month average bookings in December increased by 1.41 percent to $1.53 billion. While the general sentiment had been cautious in regards to capital spending in 2011 as a result of the current precarious state of the economy, the mood is improving. And the December bookings result may indeed be an indication that revenue growth in this year may be a bit better than initially expected.

Perhaps somewhat on the negative side was that the overall book-to-bill ratio landed below parity for the third consecutive months, indicating that supply is still larger than demand; however, I should point out the decline of this metric was mostly the result of billings growing at a much faster pace than bookings. This dynamic should bottom out in the first quarter of 2011 and may reach parity as soon as the second quarter.

Overall, I am becoming more optimistic that the semiconductor capital equipment industry will demonstrate stronger than expected revenue growth in 2011. Most recently ASML Holding NV reported its financial results for the December quarter; results that were very encouraging. Intel also had better than expected financial results for the December quarter, but more than that, their expectations for growth were very compelling. These strong growth expectations have led Intel to invest in new capital assets. Intel's management conveyed that the company will be investing $9 billion in capital expenditure, close to double the $5.2 billion spent in 2010.

I believe that PC sales should be healthy in 2011, and demand for capital equipment will continue to ramp higher, mainly driven by capacity investments in memory. High demand of tablets and smart phones in 2011 will drive capacity expansions to make more NAND Flash memory. Capacity investments in Logic and Foundry should also increase as utilization rates are running at elevated levels. While investments in technology upgrades have been going on for some time now, I think this will continue, but still at a slower pace than that reached in 2010. As it stands, I am forecasting billings growth of about five percent in 2011, up from my prior expectation of one percent.