Here are some comments on semi-equip market going forward.
<<Analysis: uncertainly lingers for IC-equipment industry
By Mark LaPedus
Silicon Strategies
05/23/2004, 1:20 PM ET
SAN JOSE, Calif. -- Uncertainty lingers in the semiconductor equipment industry despite a strong but possibly brief surge in orders.
Last week, Agilent Technologies Inc., Applied Materials Inc., and Credence Systems Corp. separately posted strong financial results. Other fab-tool vendors have also reported upbeat results in recent quarters.
Despite the endless series of positive financial statements and forecasts, there are some worrisome signs in the market. In a report issued last week, VLSI Research Inc. said the chip-equipment market was "overheated" in the first quarter, causing it to predict a slowdown in orders in Q2 and perhaps beyond. VLSI predicts that Q2 '04 revenues will decline following the end of the Japanese fiscal year and buying cycle (see May 18 story).
Another sobering report was issued by IC Insights Inc., which indicated that the ongoing restructuring in the semiconductor industry is expected to cause a slow and steady decline of "appropriate" capital spending through 2008.
Actual semiconductor capital spending as a percent of sales ratio will be approximately 22 percent in 2004 over 2003. In fact, there has been a historical average of 22 percent in terms of overall capital spending as a percent of sales ratio.
However, IC Insights believes the 22 percent figure may not be the correct--or "appropriate"--ratio. Bill McClean, president of IC Insights, suggests the "appropriate" capital spending figure has been below 22 percent and on the decline since the late 1990s (see May 18 story).
During a conference call last week, Mike Splinter, president and chief executive of Applied Materials, also indicated that capital spending as a percent of sales has been below 23 percent. As a result, Splinter concluded that the semiconductor industry "is still under-investing" as compared to other sectors.
The Applied executive made the comments after the company reported its second fiscal quarter results, which beat Wall Street's forecast. And demonstrating the ongoing shift of capital spending to Asia, Applied claims it will realize some $1 billion worth of business in China this year. "The semiconductor market continues to be healthy," he said (see May 18 story).
Last week, Applied reported its results for its second fiscal quarter. Orders increased 31.5 percent to $2.21 billion, which was in line with the company's guidance of 30 percent or more. Revenue of $2 billion was slightly better than guidance of $1.87 billion. EPS of $0.22 was $0.03 better than consensus, driven by higher operating margins.
Mixed reviews
However, analysts were mixed about Applied's results, especially about the company's long-term prospects. "We believe Applied Materials will have difficulty showing growth in earnings and revenues this cycle," said Cristina Osmena, an analyst with Jefferies & Co., an investment banking firm in New York, in a report.
"The company currently addresses a quarter of the market for wafer fab equipment and is exposed to several product segments, which we believe should grow in line to below the rest of the industry," Osmena said. "We do not believe that the company's strong performance in select segments--such as CVD for flat panel displays, etch, and services--are enough to offset the forces driving the company into a mature growth stage."
Osmena issued an "underperform" rating for Applied. "We believe that shares of AMAT have been in the process of discounting a potential order plateau later this year," she said.
Applied's third-quarter order rates are expected to grow 5-to-10 percent sequentially, while revenue will grow 5 percent, with EPS in the $0.23-0.25 range.
"Although current demand remains robust [for Applied], sequential growth rates are starting to slow after experiencing three quarters of sizeable increases," said Bill Ong, an analyst with American Technology Research Inc. of San Francisco, in a report.
"However, sequential order growth remains uncertain for Applied's October fiscal quarter," he pointed out. "Management was not prepared to make an October quarter order forecast, at least until its next earnings conference call in August. Admittedly, industry executives simply do not know if the Sept./Oct. quarter will be modestly up, flat or down sequentially from already difficult sequential comparisons. Nevertheless, the end-of-year and 1H05 outlook could show order re-acceleration with the U.S. and European chipmakers stepping up to the plate and supplementing Asian chip demand."
Ong maintained his "hold" rating on Applied's stock.. "We are adjusting CY04 EPS slightly from $0.98 to $1.00 and using this opportunity to reduce our CY05 EPS estimates from $1.48 to $1.30," he said.
Good and bad news
There is also good and bad news for Applied's archrival--Novellus Systems Inc. "We believe the company has spent the past year recovering from market share losses in PECVD and digesting acquisitions in CMP and strip," said Osmena.
"One of the less favored large cap equipment stocks by the investor base, we believe earnings power for the company is underestimated, particularly if it successfully penetrates the PVD copper barrier/seed market," she said. "Initial indications for market share penetration at the 65-nm node are promising. Most recently, we believe the company should win a portion of the Intel business for 65-nm."
The analyst has a "hold" rating on Novellus, which is projected to earn $0.96 in 2004 and $1.68 in 2005. Estimates for 2005 is above consensus $1.58.
Meanwhile, Osmena also has a "hold" rating on KLA-Tencor Corp. The company is expected to earn $1.16 in Fiscal 2004 and $2.36 in Fiscal 2005.
"We consider the company the highest quality large cap play on the equipment sector," Osmena said. "The company has done a laudable job of sustaining and growing its dominance in the process control markets it addresses and translating its market dominance into superior profits," she said.
"The company enjoys a disproportionate exposure to 300-mm and stands out as one of the few companies able to generate the strongest margins on 300-mm revenues. While a surge in 200mm purchases is currently underway, we believe that KLA-Tencor is positioned to once again outperform its peers once the landscape of equipment demand shifts back to 300-mm," she added.
ATE boom or bust?
On the automatic test equipment (ATE) side of the business, Agilent and Credence last week posted strong results in the quarter. Another ATE vendor, Teradyne Inc., last week announced a strategic agreement with Advanced Semiconductor Engineering Inc. (ASE) to supply more than 90 testers for all ASE sites over a two year period.
The backend side of the business has led the chip-equipment recovery, but uncertainty lingers for even this sector. "The whole industry is somewhat expected to see some flattening in Q2," said Jeff Schneider, marketing manager for Teradyne.
Others have a slightly different view. For example, Credence last week reported a "blowout" April quarter with $95.1 million in revenues vs. Ong's estimate of $85.5 million. Credence reported $0.06 EPS vs. Ong's estimate of $0.01.
Credence attributed the results to strong growth in China and order activity among the IDMs. "I believe we're in the early stages [of the recovery]," said Graham Siddall, Credence's chairman and chief executive, in a conference call last week.
"The strength was driven by solid demand in flash and analog/mixed signal applications, benefiting the Kalos and ASL 3000 testers, respectively," Ong said in a report. "Management conceded that the Octet tester is a bit of a disappointment as the SoC market has become more competitive and Octet's market penetration more difficult."
Credence expects July quarter revenue to be up 22-26 percent sequentially, pulling in Street consensus revenues by about two quarters. On a fully diluted EPS basis, management expects EPS in the $0.15-0.17 range. Credence also expects orders to be up 10 percent in the July quarter.
Agilent also posted strong results last week. Agilent's semiconductor test orders were up 43 percent sequentially to a record level of $286 million, led by strength in both the systems on-chip and flash markets. "We would point out that January quarter orders were down 23 percent sequentially (at $200 million) from a difficult comparison off its October quarter (at $260 million)," Ong said.>> |
