11/27/2009
By Carlos Guillen, Semiconductor Analyst

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While semiconductor capital equipment industry sales continued to be favorable in October, bookings were a cause for concern. Billings ramped up for the sixth consecutive month, but bookings flattened abruptly during October.

Given the most recent data from SEMI, the trailing three-month average billings in October totaled $690 million. This monthly result increased approximately 6.38% from the level achieved in the prior month, although it still represented a 20.8% drop from the level achieved in October 2008. Given the most recent financial results from key semiconductor capital equipment industry players such as Novellus Systems, Inc. (NVLS), Lam Research Corporation (LRCX), and ASML Holding NV (ASML), it is becoming apparent that this industry will very likely continue recovering in the last quarter of this year. Consequently, I expect fourth quarter billings to rise sequentially by 26.3%. I also estimate that American billings in 2009 will total $6.88 billion, contracting 44.2% from the $12.3 billion achieved in 2008.

The three month average bookings during October totaled $756 million, decreasing 9.94 percent from the year-ago level and remaining virtually flat sequentially. This result was quite surprising given the strong momentum bookings have had since March. I, however, continue to expect that foundry and original design manufactures will drive bookings a bit higher in this fourth quarter. Looking into early 2010, I believe the memory industry should kick in and begin to ramp up some capacity, which will provide more upside to the billing. I expect fourth quarter bookings to rise sequentially by 4.80%. I also estimate that American bookings in 2009 will total $6.29 billion, contracting 37.0% from the $9.99 billion achieved in 2008.

In October, the overall book-to-bill ratio of 1.10 continued at above parity for the fourth consecutive month, demonstrating that demand is stronger than supply. This ratio did decrease sequentially, reflecting the fact that bookings were flat while billings increased. I expect book-to-bill to pull back a bit to 0.97 as billing will likely grow faster than bookings in the December quarter.

It is apparent that as original design manufactures improve their utilization rates they will look to expand capacity, particularly for new technologies. I expect other large buyers of capital equipment, such as Taiwan Semiconductor (TSM) and Samsung, to ramp up their spending as the foundry landscape becomes more competitive.

On the memory front, there is still plenty of capacity to satisfy demand in 2009. However, capacity expansion and technology builds at the smaller nodes should provide growth for semiconductor capital equipment revenues during 2010.

Carlos Guillen
Wall Street Strategies