6/22/2010
By Carlos Guillen, Semiconductor Analyst

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North American semiconductor equipment manufactures continue to demonstrate quite favorable and encouraging signs, and we believe growth for this industry will be stronger than what many expect. According to data from SEMI, billings continued to trend higher for the thirteenth consecutive month, and bookings also continued to trend higher for the seventh consecutive month. The book-to-bill ratio also remained above parity for the eleventh consecutive month.

The trailing three-month average billings in May totaled $1.32 billion. This monthly result increased approximately 3.12 percent from the level achieved in the prior month and increased a whopping 236 percent from the year-ago level. Of course, it should be noted that billings in May of 2009 were just coming off the trough of the business as the semiconductor capital spending had retreated severely in fear of a possible depression. Although, billings are ramping consistently, they are now reaching levels comparable to those achieved in early 2008, and they are still well under the levels reached in 2007, before the great recession hit. Nonetheless the trend is encouraging, and I expect second quarter 2010 billings to rise sequentially by 19.9 percent. I also estimate that American billings in 2010 will total $14.6 billion, increasing 105 percent from the $7.13 billion achieved in 2009.

The three month average bookings in May were also encouraging and totaled $1.48 billion, not only continuing to increase sequentially by 2.18 percent but also rising above the year ago level by a whopping 415 percent, as booking in May 2009 were still close to the trough of the downturn. This positive result continues to provide support that the semiconductor equipment recovery will be better than expected in 2010.

Also encouraging was that the overall book-to-bill ratio continued at above parity for the eleventh consecutive month at 1.12, demonstrating that demand is still stronger than supply. However, it should be noted than this ratio declined slightly from the prior month, reflecting the fact that billings grew a bit faster than bookings.

So far, most the growth has been driven by technology builds, but this appears to be changing as capacity expansions are beginning to ramp up, and there is still a lot of room for demand driven growth to occur during the rest of calendar 2010. I believe that semiconductor industry utilizations rates are reaching maximum levels, increasing the likelihood of accelerating capacity expansions. Moreover, technology buys will continue, as memory makers increase production at the lower nodes. Foundries are investing aggressively for their transition to 32-nanometers and for capacity additions at 45-nanometers.

Some recent signs of capacity expansion came for the likes of Toshiba, Samsung, and Hynix. Just last month Toshiba Corp., the third largest semiconductor player according to iSuppli, said it will ramp up its capital spending to approximately $14 billion over the next three years. A week after, Samsung Electronics Co., the second largest semiconductor player, unveiled its plans to more than double its spending on new factories and equipment to a record $15.6 billion this year, a sign of confidence in the rebounding economy. Two weeks after Samsung's announcement, Hynix Semiconductor, the world's second largest memory chipmaker, said it will increase its capital expenditure by a third to approximately $2.5 billion this year to take advantage of a strong recovery in the global technology sector.

It is clear that in 2009 semiconductor companies underinvested as macroeconomic fears still loomed large. This year, however, given the much improved economic backdrop, many companies have gain lots of confidence and are investing in future growth. While most of the investments have been steered towards upgrading equipment, capacity investments are now ramping up at an increasing rate.

Carlos Guillen
Wall Street Strategies