Semi Infrastructure: KLA, Novellus, Amkor

Let’s do a quick roundup of the semiconductor infrastructure sector.

KLA-Tencor, (NASDAQ: KLAC) the world leader in yield management and process control solutions for semiconductor manufacturing and related industries, announced Q2 results on January 29. Though they managed to exceed the Street’s expectations on revenue, they fell short in their EPS figures.

Revenue of $397 million for the quarter was higher than the Street’s expectations of $394 million and represented a 26% reduction over the year. The loss of $0.12 per share was significantly higher than the market’s expectations of a loss of $0.07 per share. The previous year, KLA recorded earnings of $0.75 per share.

By region, the US contributed 64% of new orders while Japan followed with 22%. Europe brought in 7%, Taiwan 3%, and the rest of Asia 4%. There was no order contribution from Korea this quarter compared with a 13% contribution last quarter.

By segment, wafer inspection contributed 22% of total revenues. Reticle inspection contributed 8%, metrology 15%, solar, storage, high-brightness LED and other non-semi was approximately 7%, and service revenue was 48%.

KLA blamed the drop in revenue on the steep reductions imposed by its customers on capital spending, which resulted in factory shutdowns across its end markets and geographies. Customers accelerated plans to cut costs, conserve cash and scale back investment plans to reduce factory utilization throughout the quarter.

KLA expects orders to be flat compared with December, with revenue of $280-$320 million in Q3 and non-GAAP loss of $0.20-$0.35 per share.

KLA is currently the market leader in 22 of the 24 markets they serve. They will strive to ensure that they maintain this leadership despite the poor economy. Also, in a negative growth industry, the company is looking to grow faster than the industry. This won’t be easy.

Their cost control measures are already in place and they expect to see a benefit of $140-$145 million per quarter.

Following the results announcement, the stock rose 5% to $20.04. It is currently trading at $18.07 with a market capitalization of $3.3 billion.

KLA still performed better than its peers, primarily due to its presence in segments such as inspection and metrology, which ensures that customers buy its tools even in recessions. On February 4, Novellus Systems (NASDAQ: NVLS), another semiconductor infrastructure player, announced its Q4 results, which were a bigger shock.

Quarterly revenue fell 48% to $188.5 million, marginally shy of the market’s expectations of $189 million. The company reported a loss of $0.21 per share compared with the market’s estimate of $0.16 loss per share. For the year, they closed revenue at $1.0 billion with EPS of $0.07.

By region, the US contributed 43% of revenue, followed by Europe at 16%, China at 15%, Japan at 14% and Korea at 12%.

During the quarter, Novellus repurchased 1.3 million shares for $19.2 million at an average price of $14.41. They had to record a $99.5 million write-off on the impairment of acquisitions that were turned into the Industrial Applications Group.

Novellus has adopted a two-pronged approach of controlling costs and streamlining their R&D programs in response to the weak market. They are strengthening those measures through selected headcount reductions, consolidating facilities in San Jose, shedding excess real estate, cutting executive pay and initiating company-wide shutdowns for two weeks in the first quarter.

They gave a dismal outlook, a reflection of the sad state of the industry. They expect revenues to be down 41%-49% to be in the range of $95-$110 million, with loss per share in the range of $0.45-$0.60.

CEO Rick Hill qualified a “fundamental change” to the industry as one of an absence of subsidized capital to sustain unprofitable business models. He said that the semiconductor industry is driven by two major segments: IT infrastructure development and consumer electronics. The semiconductor industry is feeling the heat on account of both segments’ having cut expenses. They don’t see any improvement in conditions in the near future and are preparing for the worst.

The stock fell to $13.77 after the results announcement and is currently trading at $12.80.

Another player, Amkor Technology, Inc (NASDAQ: AMKR), is facing similar troubles. With revenue of $549 million, they exceeded the market’s expectations of $546 million even though they reported a 24% sequential decline for the quarter. But they also reported a loss of $0.03 per share compared with the previous year’s EPS of $0.46. They ended the year with revenue of $2.66 billion from $2.74 billion in 2007. For the year, EPS dropped 48% to $0.59, from $1.14 a year ago.

Amkor is no different from its competitors and is troubled by serious recessionary and industry pressures. Like others, they are trying to alleviate these pressures with cost control measures such as headcount reduction, executive pay cuts, consolidation of facilities and shutting down and disposing of excess real estate. They expect a benefit of $22 million in the first quarter from these measures.

The stock has been trading around $2.60 with a market capitalization of $483 million.