By Phil LoPiccolo, Editor-in-Chief
Leading analysts debating the prospects for industry growth at the annual “Bulls and Bears” session at SEMICON West all agreed that 2006 was shaping up to be a very good year, but were widely split in their forecasts for 2007.
Leading the charge for the bulls, Ed White, analyst with Lehman Brothers, predicted that total capital spending in 2006 would be up about 11% year-on-year over 2005, and that the equipment spending portion of that could be up more than 20%. Moreover, for 2007, he estimated that capital spending would be up about 10% with equipment spending gaining 15%. White based his forecast largely on fab construction activity for the next year, but suggested that another reason for optimism is that the industry in the midst of a multi-year upturn. “Growth will come from the fact that new semiconductor technology for the first time this decade is driving new end applications,” he said. Beyond that, he believes major efficiency gains are also on the horizon. “Equipment companies have focused heavily on reducing cost structure, sourcing materials overseas, and improving manufacturing productivity,” he said, “and we haven’t seen the benefit of that yet.”
Also bullish for 2006 but slightly less so for 2007, Merrill Lynch analyst Brett Hodess projected 16% capex growth this year and 26% equipment growth, and that next year overall capex will remain flat, with about a 5% increase in equipment sales. Despite the Y-Y swing, market cycles have moderated significantly of late, he claimed. “The bull vs. bear argument is a little different than it was in the ’90s,” he said, explaining that the memory, logic, and foundry markets are out of sync, and their highs and lows tend to offset one another to dampen total industry peaks and troughs.
Encouraged by resilient consumer demand for semiconductor products, Robert Maire, an analyst with Needham and Co., has become slightly more bullish. “At the beginning of the year, I suggested that capex spending would be up 20%-25% in 2006 compared to 2005, but it may wind up being a little bit over that,” he said, adding that 2007 could be flat relative to 2006. New markets for cell phones are quite strong, Maire pointed out, and the impact of the new PlayStation 3 gaming system will be significant, considering the dollar value of the silicon in each unit and the number of units that will be shipped before the end of the year.
Maire also expressed confidence in a strong NAND flash market. “To those more bearish analysts who try to compare the NAND flash market to the DRAM market, I would suggest that DRAM was a singular application whereas NAND is very broad based,” he said. As a result, he forecasts exponential growth for NAND flash — the cheaper NAND gets, the more applications show up to take advantage of it, which in turn creates demand for more NAND, he explained.
Countering with a slightly more pessimistic outlook for next year, Deutsche Bank analyst Stephen O’Rourke predicted that capex would be up 16%-17% this year, but would drop by 8% in 2007. “When I look at the industry overall, I think we have some incremental weakness coming over the next several quarters,” he said, citing a capacity utilization peak of about 93% in 3Q. However, he predicted that utilization would then decline in 1H07 toward the mid-80% range, which would induce a modest correction in terms of equipment digestion. “So I’m bearish in the near term and then more bullish later on,” he summed.
Citibank analyst Tim Arcuri predicted that capex and equipment spending will drop next year. “The entire chip cycle is driven by inventories and fab capacity utilization,” he explained. “If the chipmakers’ factories are going to become less full, they’re going to stop ordering equipment.” Unfortunately, while the industry has increased capacity by about 5% through 1Q06 (annualized to 20%), and will add an even higher percentage in 2Q, “there aren’t many end markets that are growing at 25% annually right now,” he argued, “so I think we’re pulling capex from next year to this year.” He compared the phenomenon to a wave that pulls water from the region in front of it as it approaches the shore. “I feel that we’re overheated, and we need to cool off.”
Panel moderator James Bagley, executive chairman of Lam Research, did not seem to be expecting an overly optimistic outlook. When introducing the panel he offered a definition of today’s model bull: “I’m not talking about the kind of raging bull featured in Merrill Lynch commercials, that big broad-shouldered, snorting, ground-pounding bovine with big horns — I’ve given up on that,” he said. “I’d settle for a male calf that still has all his parts and can grow up to be a bull,” adding that, “In my experience, bulls are like Bigfoot — you hear stories of sightings, but you never actually see one.” — P.L.
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SCORECARD: WILL 2006 CAPEX FEAST KILL APPETITES IN 2007?
Bulls:
Ed White, Lehman Brothers
– Projection: Capex +11% in 2006, +10% in 2007; equipment spending +20% in 2006, +15% in 2007
– Fab construction active over the next year, new semiconductor technology generating growth, equipment companies seeing more benefits from efforts to cut costs, source overseas, and improve manufacturing productivity
Brett Hodess, Merrill Lynch
– Projection: Capex +16% in 2006, flat in 2007; equipment +26% in 2006, +5% in 2007
– Market cycles moderating significantly; highs and lows of individual markets (memory, logic, foundry) offset one another, dampen overall industry fluctuation.
Robert Maire, Needham and Co.
– Projection: Capex “a little bit over” initial +20%-25% growth projections for 2006, flat in 2007
– Continued consumer demand; hot items include cell phones, PlayStation 3. Exponential growth for NAND flash due to broad-based applications, which will increase as price drops.
Bears:
Stephen O’Rourke, Deutsche Bank
– Projection: Capex +16%-17% in 2006, -8% in 2007.
– Capacity utilization peaking at 93% in 3Q06, declining to mid-80% in 1H07 as tool purchases are digested, inducing “modest” correction
Tim Arcuri, Citigroup
– Projection: Capex +30%, equipment +50% in 2006; lower spending for both in 2007
– Capex growth pulled from 2007 into 2006. Increasing capacity in 1H06, with few end markets to support the extra output.
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