First 4Q results point to length, not depth, of downturn

Feb. 3, 2009 – As expected, initial financial results from semiconductor equipment for the December quarter are ugly, but what’s got analysts more concerned isn’t the depth of the low marks, but how long it’ll last. Bottom line: 2H09 should get better, but real recovery might take much longer.

Here’s a quick snapshot of early filings and postings from the past week or two, with analysts’ take on the numbers and exec’s commentary.

Applied Materials (AMAT)

Summary (prelim):
Fiscal 1Q09: Revenues $1.33B (-35% Q-Q, low end of -25% to -35% outlook), net loss -$0.09 to -$0.11/EPS (vs. outlook of $0.00-$0.04 profit)
Fiscal 2Q09 projected: N/A

Applied will announce official 1Q09 results on Feb. 10. Profits were hit by ~$200M in charges: $133M for “restructuring,” $48M “for doubtful accounts receivable,” and $20M for inventory writedowns. Look for more shutdowns and restructuring activities, as yet unspecified. Wall Street had been expecting sales of $1.43B and a profit of $0.02, per AMAT’s earlier guidance.

Analyst take:
Deutsche Bank’s Stephen O’Rourke acknowledges that other semiconductor equipment suppliers have already come out with their own lousy numbers, so AMAT’s bad news isn’t too surprising, though things are weaker than expected after a widening loss and an extended shutdown over the holidays. Blame is shared among the FPD sector (customer pushouts and cancellations), “already weak silicon revenue,” and lower-margin solar PV business. “We do not believe Applied’s more diverse business segment exposure will offer much respite in the present environment,” he writes. Adding larger investments in the lower-margin solar PV business (SunFab) “may conspire to make the coming quarters even tougher.”

FormFactor (FORM)

Fiscal 4Q08: Sales $39.9M (-24% Q-Q, -67% Y-Y, EPS -$0.54 (n/i stock-based compensation), shipments $226M (-34% Q-Q)
Fiscal 1Q09 projected: Sales “in the low $30Ms,” non-GAAP gross margins ± a few percentage points.

Results were in line with reduced guidance announced earlier in the quarter (a recurring theme in the industry), though EPS was a bit below the Street’s -$0.45 EPS expectation. Outlook for 1Q, though, is well below the Street’s $39M projections. CEO Mario Ruscev indicated in the analyst call there was a weeklong shutdown in 4Q, there will be a week’s shutdown and maybe another in 1Q09.

Analyst take:
Mehdi Hosseini of FBR Research is “encouraged” by FormFactor’s commitment to reduce breakeven by 15%-20% over the next four quarters (to $50M-$55M) to limit further losses, but expectations of a business uptick from recent design wins cause hesitancy to trim much more (after announcing 22% layoffs just a few weeks ago). Despite market share gains vs. Japanese competitor MJC, though, “fundamentals have deteriorated so much that share gains are not enough to limit erosions in bookings/revenues,” he writes. Bottom line: new design wins have yet to turn into volume orders.

KLA-Tencor (KLAC)

Summary (prelim):
Fiscal 2Q09: Revenues $397M (-25% Q-Q, -38% Y-Y), net loss -$434M (vs. +$19M Q-Q, $84M Y-Y), EPS -$2.57 (vs. $0.11 Q-Q and $0.45 Y-Y), bookings $243M (*-25% Q-Q), shipments $327M (-22% Q-Q).
Fiscal 3Q09 projected: Revenues (Q-Q), Revenues $280M-$320M, non-GAAP EPS -$0.20 to -$0.35, orders flat to +20% vs. 2Q09.

Results included a $435M charge for goodwill impairment and intangible assets, without which profits would be basically breakeven. Wall Street had already taken this into account but was expecting a -$0.06 to -$0.07 loss.

Analyst take:
It’s not exactly optimism, but Deutsche Bank’s Stephen O’Rourke interprets less negativity for KLAC, saying its outlook is lousy “but not as weak as peers.” Aggressive cost-cutting (opex reduced to $140M-$145M/breakeven $300M-$325M quarterly sales, from midquarter plans of $165M-$170M/$350M-$400M, speak to expectations about the duration of this downturn,” he points out.

Lam Research (LRCX)

Fiscal 2Q09 (Dec. 2008): Sales $283.4M (-35% Q-Q, -61% Y-Y, EPS -$0.19, shipments $226M (-34% Q-Q)
Fiscal 3Q09 projected (Mar. 2009): Sales $160M-$190M (-38% Q-Q, -71% Y-Y).

Lam actually beat Wall Street’s expectations for 2Q revenues by about 2%, though a -$0.09 operating profit was nearly double the Street’s -$0.05 projections. Gross margins fell to 38.5% from 42.3% in the prior quarter. The outlook for fiscal 3Q, with sales midpoint of $175M ±$15M, is well below the Street’s initial hopes of $244.4M. Gross margins are seen slumping to 23%-25%, with an operating loss of $70M-$90M and EPS plummeting to -$0.60 to -$0.80 — the Street had projected just -$0.16.

Reducing spend rate by $15M-$20M in Nov. won’t be enough in the current “Category 5 storm,” noted CEO Steve Newberry in the analyst conference call, so more cost reductions are coming for the March quarter, on top of a weeklong shutdown in February and salary reductions (up to 17% for himself). He’s also more bearish than most on 2009 fab equipment spending, predicting a -50% decline (vs. 40%-ish from recent analysts). “Companies that clearly are planning to do technology related buys are almost on a weekly basis saying yes then no, yes then no,” he said. “Literally just two days ago, $10 million of what we were scheduled to ship in this quarter were stopped at June.”

Analyst take:
No real surprises in the 2Q results, but Lam’s startlingly poor long-term outlook for an extended slowdown — 6-8 quarters, meaning 2H10, with profitability maybe two years out — sounds alarms across the semiconductor equipment sector, notes Stephen O’Rourke of Deutsche Bank.

Semitool (SMTL)

Fiscal 1Q09: Revenues $33.1M (-45% Q-Q, -32% Y-Y), net loss -$7.4M (vs. $1.2M Q-Q, -$0.8M Y-Y), EPS -$0.19 (vs. $0.04 Q-Q, -$0.02 Y-Y)
Fiscal 2Q09 projected: Revenues $32M-$35M, shipments $33M-$36M, EPS -$0.02 to -$0.07 (incl. -$0.03 for restructuring costs)

Gross margins dipped to 43% vs. 52% in 4Q08 and 50% in 1Q08. Bookings were $22.1M; revenue backlog was $57.1M ($12.2M deferred revenue, $44.9M backlog); shipments were $31.7M. The quarter included a $3.5M writedown of receivables attributed to a “customer’s insolvency filing in a German court,” i.e. Qimonda. The company’s breakeven point has been lowered to about $33M, with another $6M in cost reductions in fiscal 1Q; added to previous efforts SMTL has reduced quarterly expenses by $50M-$60M/year.

Teradyne (TER)

Fiscal 4Q08: Revenues $195M (-34% Q-Q, -25% Y-Y), 40% gross margins (vs. 43% in 3Q), net loss -$55.3M/EPS -$0.33 (vs. $16.7M/$0.10 EPS profit in 4Q07)
Fiscal 1Q09 projected: Revenues $125M-$145M, gross margins 33%-37%, non-GAAP EPS -$0.31 to -$0.38 excluding intangibles/restructuring/special items.

EPS would have been -$0.19 without “special items.” EBITDA breakeven reduced about 30% through 2009 to $165M. New cost-saving moves include a 14% layoff and 10% salary cutbacks in 1Q, reducing expenses by about $140M on an annualized basis.

Analyst take:
FBR’s Mehdi Hosseini warns against being too optimistic about TER’s cost reductions and outlook, suggesting that they won’t be enough to offset soft end-market demand. M&A activity (i.e., NexTest and Eagle Test) has helped gain share in semiconductor test equipment and hard-disc drives, but “the size of the pie is not getting big enough, soon enough.” Specifically to DRAM test, he writes, “we are still not convinced that, other than lower ASPs, there is any real differentiation to help meaningfully displace Advantest, the market share leader (with a 50%-plus share).” Bottom line, he advises, is to not look too soon for a recovery. “Although some of our peers may argue that the time is ripe for getting aggressive because ‘it cannot get much worse,’ we argue, counter to that, that ‘it cannot get much better, either, any time soon.'”

Varian Semi. Equip. Assoc. (VSEA)

Summary (prelim):
Fiscal 1Q09: Revenues $107.4M (-40% Q-Q, -58% Y-Y), EPS -$0.19 (vs. $0.57 Y-Y).
Fiscal 2Q09 projected: Revenues $60M-$70M (-35% to -45% Q-Q), pretax loss -$21M to -$25M

1Q sales basically met Wall Street’s lowered expectations of $107.9M, but not the Street’s expectation of a -$0.12 EPS loss. For fiscal 2Q analysts had been hoping for sales of $91M.

Analyst take:
The outlook is “frustratingly negative,” though VSEA is still dominant in its sector of implant, and sales declines are entirely indicative of the overall capex environment and not marketshare losses (in fact it’s actually making inroads into the high-energy segment), notes Deutsche Bank’s Stephen O’Rourke. Though like everyone else VSEA is suffering in the current climate, he thinks the company is “the best play on an industry recovery” — when it finally occurs in late 2010, or maybe later.


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