7/29/2010
By Carlos Guillen, Semiconductor Analyst

As earnings season progresses, I am observing that great earnings news is not exactly driving the market as high as one might expect, particularly for the Tech sector. After reaching a four week low early in July, The Philadelphia Semiconductor Index (SOX) has been recuperating some lost ground, but in the last couple of days it has been trending lower. Moreover, since July 12, which was more or less the start of earnings season for the tech sector, the SOX index has barely moved, slightly increasing from 355 (closing price on 7/13) to 359 (closing price on 7/28).

The SOX' lack of upside momentum has surprisingly come in spite of overall better than expected results from some major Tech players. In particular, let's take a look at some important players in the semiconductor and semiconductor equipment industries.

Taking a look at financial 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 (on 7/12), which sequentially increased by 16.4 percent, beating the Street's consensus estimate of $312 million. Strong top-line results led to earning per share of $0.67, beating the Street's consensus estimate of $0.60.

ASML results (on 7/14) 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. Earnings were also above the Street's estimates by 21%.

Lam Research Corporation (LRCX) also reported excellent quarterly results (on 7/28). The company reported revenue of $695 million and earnings per share of $1.10, which were both above the Street's estimates calling for revenue of $656 million and earnings per share of $0.97.

Now taking a look at the top-line results from a couple of semiconductor players, I also observed overall strong results. Intel's second quarter revenue was simply phenomenal (reported on 7/13). Strong demand drove revenue to $10.8 billion, topping the Street's $10.3 billion estimate and management's $9.8 billion to $10.6 billion guidance range. Revenue was sequentially up 4.52%, but it should have been seasonally down by approximately 1%, so the result defied seasonality. What was very encouraging was that the better than expected revenue was fueled by continuing end-demand, particularly from enterprise. Earnings per share were $0.51, significantly higher than the Street's estimate of $0.43.

Despite the fact that the AMD's second quarter is typically a down quarter, the June quarter revenue of $1.65 billion (reported on 7/15) landed above the Street's $1.55 billion consensus estimate and above management's $1.50 billion to $1.57 billion implied expectation. This revenue increased 5.02% sequentially, and it increased 39.6% from the year-ago level when revenue was just coming off a trough caused by the recession. Revenue was positively affected by increasing enterprise spending and by strong demand for the company's graphics products. On the bottom line, the company reported a non-GAAP earnings per share of $0.11, representing a significant improvement from the year-ago loss of $0.37 and a nice improvement from the $0.09 gain posted in the prior quarter. This result was significantly better than the Street's estimated loss of $0.06.

Texas Instrument's June quarter results were not surprising, as revenue and earnings were essentially in-line with the Street's estimates (reported on 7/19). However, for the September quarter, TI forecasted revenue of $3.55 billion to $3.85 billion and earnings per share of $0.64 to $0.74. The midpoint of both of these forecasts was better than the Street's estimates calling for earning per share of $0.64 and revenue of $3.65 billion.

Linear Technology delivered a better than expected June quarter results (on 7/20). The company posted revenue of $366 million and non-GAAP earnings per share $0.59, beating the Street's revenue estimate of $339 million and earnings estimate of $0.51. Revenue in the quarter was up 18% sequentially and 76% on a year-over-year basis. Management also guided revenue to increase in the range of $281 million and $292 million, nicely higher than the Street's consensus of $345 million.

Intersil's revenue continued to accelerates in the June Quarter, coming in at $220 million and landing above the Street's estimate of $218 million (reported on 7/21). Revenue increased by 16.1% sequentially and by a whopping 49.3% year-over-year. Non-GAAP earnings per share of $0.25 came in above the Street's consensus estimate of $0.09. Management also guided revenue to increase in the range of $230 million and $238 million, higher than the Street's consensus estimate of $231 million.

All in all, so far the financial results for these semiconductor and semiconductor equipment players have been better than expected, but still the SOX index is still essentially at the same level reached at the beginning of earning season. While there are a lot of forces at play here, I think one major factor is keeping this index and virtually all indexes under pressure; that is simply jobs. Investors continue to feel uncertain about the economy, and the persistently high unemployment level is in everyone's mind. Consumption represents approximately 70% of GDP, and with continuing high unemployment levels, investors are finding it difficult to see strong consumption growth in the near future.

Carlos Guillen
Wall Street Strategies