MARCH 7, 2003
TECH KNOWLEDGE
By Richard Tortoriello
Chip Equipment: A Lingering Fog | Overcapacity in semiconductor markets may keep a lid on capital-equipment orders -- until corporate profits and spending pick up
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Standard & Poor's expects modest growth -- perhaps 5% to 10% -- in semiconductor equipment sales in 2003. After a nearly 60% decline in industry revenues from 2000 to 2002, growth of 5% to 10% would indicate that the group is stabilizing. However, the environment remains difficult. Very few chipmakers and equipment makers have been able to provide guidance about likely orders and sales trends beyond the current quarter. For instance, in its Mar. 6 update on how the first quarter is shaping up, Intel (INTC ) said that while revenues are in line with expected seasonal trends, it doesn't have enough evidence to call a recovery in corporate information-technology spending.
Recent trends in chipmakers' unit-production volumes, however, have turned modestly favorable. Although chip prices declined in 2002 and worldwide sales grew only 1.3%, unit volume increased 14% for the year. Semiconductor unit volumes are now nearly 90% of 2000 peak production levels. Meanwhile, average selling prices of chips, which have dropped sharply over the past two years, have shown signs of stabilization. As a result, although some high-profile chip companies like Intel have cut capital-spending plans for 2003, other chipmakers have increased them.
What's more, the latest Bureau of Economic Analysis gross domestic product statistics show that business spending on equipment and software rose for the third straight quarter in December (up 6.6% annualized for the quarter), after six straight quarterly declines. This data may signal the beginning of a much-anticipated upgrade in PCs at corporations.
"TIMING ISSUES." However, prospects of war and terrorism, rising prices for oil and natural gas, and a shaky world economy have begun to put a damper on what S&P viewed as a nascent recovery in electronics markets. As an indicator, the Conference Board's consumer confidence index for February plunged nearly 15 points, to 64, the third consecutive monthly decline. In addition, a number of equipment companies say chipmakers have recently delayed orders as they assess current political and economic trends.
The latest results from chipmaking-equipment leader Applied Materials (AMAT ) underscore the challenging times. It announced that fiscal first-quarter (ended Jan. 31) bookings fell 35% from the fourth quarter, vs. its original projection of a 20% decline. Applied blamed the shortfall on cutbacks in spare parts and service contracts, as well as "timing issues" (which we interpret as order push-outs) in its Etec photomask equipment business. We at S&P believe that chipmakers have simply begun reining in planned spending given the uncertain outlooks for their electronics goods customers.
Applied (ranked 1 S&P STARS, or sell) said it expects slight sales and orders increases in the second quarter and earnings per share of 1 cent or 2 cents. As a result, Wall Street analysts have cut their earnings numbers for Applied, bringing the mean earnings per share estimate for fiscal 2003 (ending Oct. 31) to 14 cents, from 20 cents within the past 30 days.
TWIN DEMONS. Direct competitor Novellus Systems (NVLS ), which has more of its product line tied directly to the transition to copper interconnects, saw orders decline only 6% in its fourth quarter, ended Dec. 31. The use of copper, which is rapidly replacing aluminum as the interconnect wiring material on semiconductors, allows improvements in both speed and power efficiency. For the first quarter, ending Mar. 31, Novellus sees sales increasing about 8% from the fourth quarter, with bookings rising about 11%. It expects EPS of 7 cents, vs. 11 cents (excluding acquisition and restructuring charges of 8 cents per share) in the fourth quarter.
However, Novellus (ranked 2 STARS, or avoid) is facing the twin demons of low factory utilization rates (which compress gross margins, since fixed manufacturing costs must be paid regardless of manufacturing volume) and competitive pricing pressure. As a result, gross margins remain mired in the mid- to low-40% range, well below Novellus' historical average of 55%.
On the positive side, we're seeing signs of increased spending on capital equipment in Japan. With falling worldwide market share and huge operating losses, Japan's large electronics makers cut capital spending by an estimated 60% in 2001 and more than 20% in 2002. Many of these companies have restructured their chipmaking subsidiaries (examples include the Hitachi/Mitsubishi joint venture, Renesas, and the NEC/Hitachi memory-chip joint venture, Elpida). Their preliminary budgets call for an increase in capital spending by as much as 32% in 2003 -- and much of this will be spent on new equipment.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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