Semi Equipment Downturn Still Misunderstood

North American-based manufacturers of semiconductor equipment posted $1.44 billion in orders in July 2007 (three-month average basis) and a book-to-bill ratio of 0.84 according to the July 2007 Book-to-Bill Report published by trade organization Semiconductor Equipment and Materials International [SEMI]. A book-to-bill of 0.84 means that $84 worth of orders were received for every $100 of product billed for the month. According to Solid State Technology Magazine:

The real story is bookings (orders), which slumped more than 10% M-M in July and about 17% Y-Y to $1.44 billion -- the biggest monthly decline since Oct. 2006, and biggest Y-Y dropoff since late 2005. It's also the first month of double-digit declines both M-M and Y-Y since January 2005. "Orders have slowed from the strong levels observed in the first part of this year," noted Stanley Myers, president/CEO of SEMI, in a statement.

Make that an understatement. Finally, the industry is coming around to the notion that the downturn is more than a short-term blip. Not that I mind - the more people understand there is a cyclical downturn the sooner the stocks can move past it.

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Just to double check and make sure that the downturn is indeed well recognized, I skimmed through some recent semiconductor equipment earnings conference calls.

Applied Materials (AMAT) recognizes it.

Steven O’Rourke - Deutsche Bank

Thank you. Good afternoon. A couple of questions. First, I hate to beat a dead horse but are the foundries telling you anything different now than they told you three months ago?

Michael R. Splinter

Well, if you look at our revenue in Q3, we had an up-tick in foundry orders that we delivered in the quarter, had some good turns business, and so we -- three months ago we kind of expected that trend to continue throughout the year and it’s not. And so yes, there is a fairly substantial difference between now and May.

(Excerpt from full AMAT conference call transcript)

Lam Research (LRCX) does not.

We expect that foundry shipments for Lam will be weak in the September quarter as a function of the pull-ins to June and we expect that shipments in foundry will strengthen in the December quarter. Shipments for Logic, Flash other and MPU are expected to be flat in the second half compared with the first half.

(Excerpt from full LRCX conference call transcript)

KLA Tencor (KLAC) is still thinking it is a seasonal issue. Note to KLAC: year/year comparisons are not affected by seasonality.

Our September outlook is a little complex this year, as we have a number of factors impacting our results, largely related to recent acquisitions. Jeff will give you more of the details. Given that, our bookings outlook for September is down 15%, with a range of plus or minus 10%. This is on par with the typical seasonality we experience in September.

(Excerpt from full KLAC conference call transcript)

Unfortunately, it doesn't sound like the downturn is as well-understood as I was hoping.

Disclosure: William Trent owns put options against the shares of Lam Research (LRCX) and is short put options against shares in the Semiconductor HOLDRS (SMH).