7/23/2010
By Carlos Guillen, Semiconductor Analyst

More Articles by Carlos Guillen

Only One Force Matters ... Jobs

Sentiment and GDP Shakes Market

Equities Slightly Pull Back

North American semiconductor equipment manufactures continue to demonstrate quite favorable and encouraging signs, and we believe growth prospects for this industry are still very strong. According to data from SEMI, billings continued to trend higher for the fourteenth consecutive month, and bookings also continued to trend higher for the eighth consecutive month. The book-to-bill ratio also remained above parity for the twelfth consecutive month. More encouraging signs also came in last week from semiconductor equipment top players such as Novellus (NVLS) and ASML Holdings (ASML).

The trailing three-month average billings in June totaled $1.42 billion. This monthly result increased approximately 5.7 percent from the level achieved in the prior month and increased a whopping 223 percent from the year-ago level. Of course, it should be noted that billings in June of 2009 were just coming off the trough of the business as the semiconductor capital spending had severely retreated in fear of a possible depression. Although, billings have been ramping consistently, they are now reaching levels comparable to those achieved in late 2007, when the great recession began. Nonetheless the trend is encouraging, and I expect 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 June were also encouraging and totaled $1.69 billion, not only continuing to increase sequentially by 10.5 percent but also rising above the year ago level by a whopping 379 percent, as booking in June 2009 were still close to the trough of the downturn. This positive result continues to provide support that the semiconductor equipment recovery will be strong in 2010.

Also encouraging was that the overall book-to-bill ratio continued at above parity for the twelfth consecutive month at 1.19, demonstrating that demand is still stronger than supply. It should be noted than this ratio actually increased slightly from the prior month, reflecting the fact that bookings grew a bit faster than billings.

Aside from this industry data, taking a look at the top-line results from a couple of semiconductor equipment main players that have recently reported their second quarter financial statements, I can observe an encouraging pattern; that is, that they are delivering better than expected results. In fact, Novellus had initially forecasted revenue to be between $285 million and $315 million, but the company actual delivered revenue of $321 million, which sequentially increased by 16.4 percent, beating the Street's consensus estimate of $312 million. ASML results were also strong. The company had projected revenue of 1 billion Euros a quarter ago, but ended the June quarter with revenue of 1.07 billion Euros, growing sequentially by 44.2 percent and landing above the Street's estimate of 1.0 billion Euros. Also worth mentioning is a small-cap player called Ultratec (UTEK), which delivered revenue of $31.6 million, up 14.7% sequentially and higher than that Street's consensus estimate of $29.9 million.

Capacity expansions have been ramping higher across the semiconductor industry, and there is still room for more growth during the rest of calendar 2010. For instance, most recently Intel raised its 2010 capital spending forecast to $5.2 billion (plus or minus $200 million); this compares to the company's prior expectation of $4.8 billion (plus or minus $100 million). So it seems that semiconductor companies are sensing ramping demand and are planning for more capacity availability.

In general, I continue to believe that worldwide semiconductor revenues will grow at a stronger than expected pace in 2010. Despite fears of a slowdown coming from Europe and China, I see strong growth driven by a ramping corporate refresh cycle, which had been delayed and has gained potential. At the moment, I see minimal downside risk in terms of corporate spending and am much more optimistic about a sharp upturn in IT spending in the second half of 2010. I also see semiconductor revenue growth that will be driven by emerging markets where PC growth is in its early stages. Demand for internet access is also growing rapidly and should also serve as a growth catalyst. As a result, I believe the semiconductor revenue momentum will continue, and I expect semiconductor revenue during 2010 to grow by 29 percent. This strong growth will undoubtedly generate continuing demand for capacity expansions, benefiting semiconductor capital equipment players.

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