The Semiconductor Capital Equipment Companies Confirm It's A Smartphone And Tablet Post-PC World

Includes: AMAT, KLAC, LRCX
by: Silicon Valley Insights

The three top semiconductor manufacturing and test equipment companies, Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX) and KLA Tencor (NASDAQ:KLAC) held their usual investor meetings at the Semicon West trade show this week in San Francisco.

These three companies said demand for new semiconductor manufacturing and test equipment is virtually all for devices for smartphones and tablets. PC demand is declining and any growth from the networking and data center equipment sectors pales by comparison to that in ICs and other components for smartphones and tablets.

None of these managements said they had seen any impact from the recent trimming of some smartphone estimates for H2 2013 sales.

After the semiconductor capital equipment industry revenues approach or reach $30 billion this year, they are now expected to increase modestly next year and reach as much as $35 billion in 2015 and $40 billion in 2016.

While the company presentations focused on annual business growth over the next three years, it is noteworthy that there is a seasonal cycle to the installation of major new systems, excluding service work. Orders tend to accelerate in the fall and winter for new equipment to be installed in the spring to begin production in the summer of next generation ICs and other components that will be in the many new end user devices launched in the late summer and early fall. This cycle is especially true with smartphones and tablets, currently the primary industry growth drivers.

This can lead to lower revenues in the September than June quarters and KLA Tencor 's management alluded to how this was true in 12 of the last 15 years. However, Applied Materials and Lam Research managements said nothing to suggest that the expected better-than-average sequential September quarter revenue growth is not likely.

Applied Materials' annual investor meeting at Semicon West had management forecasting good growth in 2014-2016 for both its semi equipment and the display sectors. Solar is already at minimal levels and received little focus. Both semi equipment and display are being driven by smartphones, tablets and other potential mobile devices including possibly wearable technology in the future.

Beginning next year and ramping strongly in 2015 will be new greenfield factories to produce 3D NAND flash, the next major technology that is currently in development labs. Current NAND flash spending is to upgrade equipment in current fabs. Even nearer is the move to FinFET technology for mobile processors produced on sub-20nm technologies.

Applied Materials management sees opportunities to increase its market share a few points in both semi equipment and display, and improve operating margins a few points on the revenue growth the next three years. This is not new guidance but they exuded increased confidence they will see the better growth.

With this solid and accelerating outlook, Applied Materials shares are attractive here for continued appreciation.

The replay of the Applied Materials meeting can be found here.

Lam Research: Following the closing of its Novellus acquisition last November, Lam Research held an investor meeting and put forth a new P&L model and integration plans. This week's meeting was to say the integration has progressed well, cost synergies are being realized and many new products have already been launched in both sides of the two former businesses.

At this meeting, they showed the same P&L model for this calendar year and said they have increased confidence they will hit it. And it reflects good H2 growth with annualized run rate increases of:

  • Revenues up from $3.6 billion to $4.1 billion with further increases to $4.5-5.3 billion by 2015/2016.
  • Operating margins up from 11% to 17% with further increases to 19-22% by 2015/2016. a divestiture is behind much of the H2 2013 improvement.

They forecast their TAM will increase from $8 billion to $9 billion due to new products for the growing segments of the overall semiconductor production they serve. This is based on the TAM they address being 26% of the total market that they see increasing from $30 billion this year to $35-40 billion by 2015/2016.

The $1 billion TAM increase to $9 billion is a significant increase and Lam Research shares spiked when they said it and then closed strong yesterday. it will lead to increased expectations and estimates.

Accordingly, I now newly suggest purchase of Lam Research shares.

The replay of the Lam Research meeting can be found here.

KLA Tencor held its annual investor meeting yesterday afternoon at the Semicon West industry trade show. In management's relatively short presentation they said:

1. June FQ4 revenues, bookings and earnings were in the upper halves of their guidance ranges. KLA Tencor shares surged 1.5% on this comment.

2. The quarterly dividend was increased 12.5% from $0.40 to $0.45.

3. Their NanoPoint technology is seeing an acceleration of adoption and driving increasing usefulness and demand for the company's higher-end brightfield inspection systems.

4. Orders and revenues have declined sequentially in the September quarter 12 of the last 15 years seasonally. KLA Tencor management did not provide guidance but made it sound like this could be the case again this year.

Given current estimates anticipate a sequential increase this year in the September quarter, I am less positive on KLA Tencor than on Applied Materials or LRCX shares.

The replay of the KLA meeting can be found here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.