KLA, Applied Improving

The Semiconductor Industry Association forecasts worldwide semiconductor sales to fall by 21% over the year to $195.6 billion in 2009 compared with $248.6 billion in 2008. Year-to-date sales of $95.9 billion have already fallen 25% fall over the year. But sales are expected to pick up and grow at a CAGR of 6.5% to reach $221.9 billion by 2011.

Recovery is already on its way. In Q2 of the current fiscal, worldwide sales of semiconductors grew 17% sequentially to $51.7 billion and declined 20% over the year. In July, sales rose 5.3% over June to $18.2 billion and it was the fifth consecutive month of increase in sales. The growth is being witnessed across the world, with Japan leading the pack at 7.9% growth over the month. American and European consumption grew 5.9% and 5.3% respectively, with the rest of Asia Pacific growing 4.3% over the month.

But KLA-Tencor (NASDAQ:KLAC) announced another weak quarter. Q4 revenues of $282 million fell 52% over the year and missed analysts’ expected $297 million target. The company suffered a loss of $0.15 per share compared with earnings of $0.43 earned a year ago.

For the quarter, US contributed 29% of new system orders in Q4 compared with the 43% contribution in the March quarter. Japan at 4% was significantly lower than 11% while Korea grew to 13% from 9% last quarter. Taiwan also grew to 46% from 31% last quarter while the rest of Asia remained flat at a 4% contribution.

By segments, wafer inspection revenues grew to 34% from 32% last quarter. Critical inspection contribution was 10% from 17% last quarter while Metrology was at 18%, from 10% in the prior quarter. Solar, storage, high brightness LED and other non-semi contributed 7% growing from 2% contribution last quarter. Service was 31% of new orders in Q4, down from 39% last quarter.

Foundry customers comprised 53% of semiconductors systems orders, with logic and memory orders bringing in 37% and 10% respectively. Forty-five nanometer and below development pilot activity comprised 97% of the semiconductor system orders received this quarter versus 95% in the March quarter.

For the year, they recorded revenues of $1.06 billion with a loss of $3.07 per share. A year ago, they had earned revenues of $2.03 billion with an EPS of $1.95.

The company is seeing demand stabilize. New orders for June of $327 million grew 19% over March and were driven by demand in foundries and logic. Memory continued to remain at lower levels.

Going forward, for Q1 KLA-Tencor projects orders to be flat to 20% higher over the June quarter with revenues of $295 million to $335 million. They expect EPS to range from a loss of $0.10 per share to breakeven.

KLA is continuing to expand their product offerings. They recently launched a new 2830 Series broadband brightfield wafer defect inspection systems to enable more repeatable capture of defects affecting devices at the 3Xnm design rule and beyond. They also introduced a revised Puma 9500 Series darkfield wafer defect inspection systems which features twice the resolution and twice the speed of its predecessors, allowing fabs to support a dimension shrink without impacting productivity. The company’s recently launched eDR-5210 e-beam defect review and classification system also offers improved image quality and connectivity to KLA-Tencor’s inspection systems to help accelerate identification of defect sources.

The stock is trading at $34.32, taking KLA-Tencor’s market capitalization to $5.9 billion.

Again this quarter, Applied Materials (NASDAQ:AMAT) did better than the rest of its peers. Q3 revenues of $1.13 billion exceeded the market’s expected $0.95 billion but fell 39% over the year. Loss per share of $0.03 was significantly lower than the Street’s expected $0.08 loss per share.

By segment, revenues from the core silicon systems group fell to $498 million from the $756 million earned a year ago. Their solar expansion efforts also fared well, with revenues growing to $224 million from $174 million earned a year ago.

There was sequential growth across all segments. In semiconductors, IC demand grew 15% in revenue and 25% in volume in the quarter. Industry average utilization also showed improvement to 75% from 70% in the previous quarter. Silicon systems orders more than doubled over the quarter to $542 million, with nearly 70% orders coming from foundry and DRAM customers.

DRAM shipments grew 9% over the year. AMAT believes that by the end of the next fiscal, the DRAM industry will transition fully to DDR3 thus creating a $2 billion worth market opportunity for them. The growth in the use of phones and portable media players helped drive nan bit growth to 36% over the year.

Factory utilization rates are improving even in the applied global services segment. Wafer starts among the semiconductor customers were down 30% over the year, but they expect improvement driven by increased wafer starts. Orders grew 26% sequentially to $298 million with revenue growing 7% sequentially to $343 million.

With global LCD TV unit demand expected to grow at 20% in the year, their was also growth in the display segment orders, from $13 million a quarter ago to $96 million. This growth is driven primarily in China and the US, and Applied expects investment to grow in the Gen 8.5 modules in the second half of the year. Panel ASPs grew 15% over the year.

While Applied might be driving the solar segment, many analysts are worrying about their focus. Applied expects annual PV solar installations to grow at a 30% compounded rate with more than 4 gigawatts of capacity to be added by 2010. With input prices of polysilicon and modules falling, and subsidies increasing for Chinese manufacturers, many believe that the market is going to be flooded by low-priced Chinese equipment, making it difficult for vendors to sell their inventory. A recent report released by iSuppli predicts that almost half of solar panels made in the current year will remain unsold, and the glut will persist until 2012.

Yet, Applied does not seem to be deterred. There are market rumors that the company is looking to bid for Energy Conversion Devices (ENER) at $18 per share. Well, that would be a major shift in strategy and focus, but perhaps one that is not unwelcome at a time when the semiconductor infrastructure business overall is facing structural challenges. Falling chip costs have created tremendous pressure on the semiconductor equipment and design tools sectors, and to get our of the rut, Applied is looking at solar.

In the current quarter, AMAT expect revenues of $1.24 billion to $1.36 billion with EPS of $0.00 to $0.04, beating analysts’ expectations of revenues of $1.06 billion with a loss of $0.05 per share.

AMAT’s stock is currently trading at $13.69 with a market capitalization of $18.2 billion.