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KLA Struggling, AMAT Sun Bound

Posted on Wednesday, Jun 17th 2009

While the economy might have picked up a bit, the semiconductor infrastructure industry’s latest results still leave a lot to be desired. KLA-Tencor’s (NASDAQ:KLAC) recently announced Q3 revenues of $309.6 million is a drop of 49% over the previous year’s $602.2 million. Last year’s EPS of $0.61 also fell drastically to loss per share of $0.34 and exceeded the market’s estimated loss of $0.26 per share. Boy, this looks scary!

By region, the US contributed 43% of new system orders and Europe brought in only 2%. Excluding Japan, whose contribution to new orders fell to 11%, other parts of Asia did rather well with Korea growing to 9% contribution, Taiwan coming in at 31%, and the rest of Asia remaining flat at 4% over the quarter.

Sequentially, the company saw significant growth in the contribution of Wafer Inspection at 32% and Reticle Inspection at 17%. However, Metrology’s sequential contribution fell to 10% while the Solar, Storage, High-brightness LED and other non-semi contribution fell to 2%. Services also registered a sequential decline and contributed 39% of new orders. However, the company saw most activity in 45-nanometer and below development and pilot activity, which contributed roughly 95% of the semiconductor systems orders received in the quarter.

Going forward, KLA-Tencor is expecting orders to be flat or plus or minus 20% compared with the current quarter, with revenues of $270-$310 million in Q4 and non-GAAP loss of $0.08-$0.24 per share.

One of KLA’s areas of emphasis for the year was improving customer focus, which they are achieving through investments and strengthening engagements through a more collaborative approach. Their commitment to innovation and product introduction during the quarter has helped them retain their market leadership position and also grow in markets where they were relatively weaker. But the broader trend of falling prices and margins in the highly competitive consumer chip business has sent shivers through the semiconductor infrastructure business. The chill continues.

In addition to their current product offerings, they believe that they are on way to “significantly out- investing” their competitors. They are investing heavily to be in a position to bring new products to the markets at a faster pace over the coming quarters. Close customer ties and their new product range they hope will help them capture a bigger pie once the market recovers. The problem is that the overall market is shrinking.

Continuing cost-control measures, the company announced further job cuts of 10% of the workforce and additional plans to consolidate facilities.

The stock is currently trading at $25.50, taking its market capitalization to nearly $4.3 billion.

The other player, Applied Materials (AMAT), the largest supplier of tools for making microchips, did not have a better quarter than KLA-Tencor. Q2 revenues of $1.02 billion fell 53% over the year with a loss of $0.10 per share. A year ago, they earned $0.26 per share. New orders in the quarter were down 73% to $649 million, and the backlog stood at $3.16 billion, down from $4.05 a quarter ago.

By segment, Silicon Solutions Group (SSG) revenue fell 80% over the year to $0.26 billion. Applied Global Services (AGS) revenue of $0.32 billion fell 47% over the year and revenue from Display Operations of $0.08 billion fell 58% over the year. The only segment to register growth was the Energy and Environmental Solutions (EES), where revenue of $0.36 billion grew 320% over the year, driven by two new SunFabs recognized in the quarter.

During the past half year, AMAT signed off five factories in four countries in the solar space. Their total SunFab capacity has now reached 200 megawatts and their customers have produced more than a quarter of a million panels. They have demonstrated module efficiency beyond 9% in the lab and are targeting 10% efficiency in production, with production costs under $1 per watt by the end of 2010. They are making substantial R&D investments in thin film, and anticipate a number of active SunFab opportunities to be converted to contracts in the coming months. In an otherwise dismal picture, solar looks like a promising growth market in which AMAT may find a bright future.

The company seems optimistic about the future as they are already seeing signs of recovery in China and a slowdown in the US recession. With demand growing for mobile handsets, personal computers, TVs and infrastructure, Applied Materials hopes to see improvement in factory utilization in semiconductor and display.

Like their peers, they continued to focus on investing in improved product ranges during the quarter. In Silicon, they anticipate market demand to rise from its bottom, even though it remains at very low levels. In Logic their customers reported shrinking inventory levels and stronger order flows. Foundry utilization is also expected to improve from levels of sub-50% in calendar Q1 to nearly 70% by the end of Q2.

While the SSG segment is improving, it is primarily driven by technology buys. AMAT is expecting industry demand for wafer fab equipment to be $8-$11 billion in 2009 compared to the $10-$12 billion estimated last quarter.

Again like their peers, they are seeing customers focus on technology buys designed to move capacity to the next node and investing in next-generation products. Additionally, AMAT is also driving new business processes and operating efficiencies to help minimize costs now and emerge stronger from the recovery.

Despite the company’s optimism, their outlook for Q3 was negative as they expected revenues to be flat or down 15%. They are projecting a loss of $0.06-$0.14 per share.

AMAT’s stock is currently trading at $11.10, taking its market capitalization to $14.8 billion.

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They had the industry by the preverbal testies and they acted accordingly. I know if there were competitive alternatives available, KLA would be building measurement equipment in Antarctica for measuring penguin’s migratory patterns.

The only company that treats their customer’s worse is AMAT, again the biggest bully on the block. And as with KLA, when a competitive alternative becomes available (and it will happen) they will be left wondering what happened.

Blee Wednesday, June 17, 2009 at 11:46 AM PT