8/23/2010
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 fifteenth consecutive month, and bookings also continued to trend higher for the ninth consecutive month. The book-to-bill ratio also remained above parity for the thirteenth consecutive month. More encouraging signs also came in last week from the number one semiconductor equipment player, Applied Materials (AMAT).

The trailing three-month average billings in July totaled $1.49 billion. This monthly result increased approximately 1.85 percent from the level achieved in the prior month and increased a whopping 177 percent from the year-ago level. Of course, it should be noted that billings in July of 2009 were just beginning to ramp up from 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 the fall 2007, when the great recession was about to begin. Nonetheless the trend is encouraging, and I expect that American billings in 2010 will total $15.1 billion, increasing 112 percent from the $7.13 billion achieved in 2009.

The three month average bookings in July were also encouraging and totaled $1.83 billion, not only continuing to increase sequentially by 5.92 percent but also rising above the year ago level by a whopping 220 percent, as booking in July 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 thirteenth consecutive month at 1.23, 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 most recent top-line result from the number one semiconductor equipment player, I can observe more encouraging signs. Although Applied Materials had initially forecasted revenue to be between $2.25 billion and $2.41 billion, the company actually delivered revenue of $2.52 billion, which sequentially increased by 9.68 percent, beating the Street�fs consensus estimate of $2.38 billion. The strong revenue result was mostly driven by strong crystalline silicon solar sales and by healthy silicon segment business. It was also encouraging to hear that Applied Materials continues to see wafer fab spending growth of about 110% in 2010. Moreover, management is now tracking 15 new fabs and fab expansions, up from the 11 seen in the prior quarter. Fiscal fourth quarter guidance (quarter ending in October) was also much better than expected. Management expects revenue be flat to up 5% sequentially, which puts revenue anywhere from $2.52 billion to $2.64 billion, above the Street�fs consensus estimate of $2.38 billion.

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, at the end of July Taiwan Semiconductor (TSM) raised its 2010 capital spending forecast, which bodes well for semiconductor equipment players. The company said it now expects to spend $5.9 billion on capital expenditures in 2010, up from its previous forecast of $4.8 billion, representing an increase of approximately 23%. A couple of week prior to this, Intel had also raised its 2010 capital spending forecast to $5.2 billion (plus or minus $200 million); this compared to the company�fs 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.

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 gained lots of confidence and are investing in future growth. While most of the investments had been steered towards upgrading equipment, capacity investments are now ramping up at an increasing rate.

Carlos Guillen
Wall Street Strategies