2/22/2010
By Carlos Guillen, Semiconductor Analyst

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Now that most of the major players in the Semiconductor Capital Equipment industry have reported their financial results for the December quarter, it is becoming more and more apparent that revenue growth in 2010 is looking much stronger for this industry than I previously anticipated.

About a month ago, industry research group iSuppli projected that growth on global semiconductor manufacturing equipment spending should rise by 46.8% in 2010 from 2009 levels. However, given the commentaries and forecasts coming from major semiconductor equipment players, it appears that this business may in fact grow even faster.

For starters Applied Material (AMAT), the largest player in Semiconductor Capital Equipment industry, reported surprisingly high January quarter revenue of $1.85 billion, which grew 21.1% sequentially and was significantly higher than the Street's consensus estimate of $1.75 billion. More encouraging, however, was that management demonstrated increasing confidence, providing strong revenue growth not only in the April quarter but also in all of fiscal 2010. As a result of this new level of confidence, management expects revenue to grow at least by 50% in fiscal 2010, higher than its prior expectation calling for 30% revenue growth. Management also raised its expectations for the market's wafer fab equipment spending in 2010 to the range of $21 billion to $23 billion, up from prior expectation of $18 billion to $20 billion.

KLA-Tencor Corp. (KLAC) also provided strong quarterly revenue and indicated strong growth in 2010. December quarter revenue came in at $440 million, growing 28.5% sequentially and landing above the Street's estimate of $438 million. Also encouraging was that management expects to see semiconductor industry demand rise in the range of 50% to 60% in 2010.

Novellus Systems, Inc. (NVLS), another key player in the semiconductor equipment industry, reported revenue of $244 million, which grew by 38.1% sequentially and beat the Street's consensus estimate of $237 million. Moreover, management believes that spending in semiconductor capital equipment should increase by 60% to 75% in 2010. This is, perhaps, the highest growth projection I have seen so far.

One more important chip equipment maker, Lam Research Corporation (LRCX) reported revenue of $487 million, which grew by a whopping 52.9% sequentially and landed ahead of the Street's consensus estimate of $ $454 million and above management's own guidance range of $440 million to $460 million. Also indicating strong semiconductor equipment industry growth, management said it expects to see wafer fab equipment growth in the 60% range.

Providing more support for strong growth in 2010, according to data from SEMI, billings continued to trend higher for the ninth consecutive month, and bookings also jumped higher. The book-to-bill ratio also remained above parity for the seventh consecutive month, ticking sequentially higher.

The trailing three-month average billings in January totaled $946 million. This monthly result increased approximately 11.3% from the level achieved in the prior month and increased 62.0% from the year-ago level. I expect first quarter 2010 billings to rise sequentially by 18.4%. I also estimate that American billings in 2010 will total $12.5 billion, increasing 75.6% from the $7.13 billion achieved in 2009.

The three month average bookings in January were also encouraging and totaled $1.13 billion, not only continuing to increase sequentially by 24.1% but also rising above the year ago level by a whopping 309%. This positive result continues to provide more support that a semiconductor equipment recovery will be better than expected. I expect first quarter bookings to rise sequentially by 16.1%, leading American bookings in 2010 to a total of $12.2 billion, increasing 79.1% from the $6.81 billion achieved in 2009.

In January, the overall book-to-bill ratio continued at above parity for the seventh consecutive month at 1.12, demonstrating that demand is stronger than supply. In fact, demand grew faster than supply, represented by sequentially increasing book-to-bill ratio.

It is apparent that original design manufactures are improving their utilization rates and, as such, they will look to expand capacity, particularly for new technologies. Foundries are investing aggressively for their transition to 32-nanometers and for capacity additions at 45-nanometers.

On the memory front, there is still plenty of capacity to satisfy demand. However, technology builds at the smaller nodes should also provide growth for semiconductor capital equipment revenues in 2010. Memory bit demand will likely outpace supply in 2010.

Carlos Guillen
Wall Street Strategies