Semiconductor equipment billings at 1994 levels as semis continue to underspend

USA: SEMI reported that North America-based manufacturers of semiconductor equipment posted a three-month average of worldwide billings in September 2009 of $624.6 million. While that figure is up 7.7 percent from August 2009, the last time billings were at the $625 million level was August 1994.

Clearly, the semiconductor equipment industry is in turmoil, but we need to understand why this is happening.

The chart shows the spread between semiconductor sales and semiconductor equipment sales between January 1994 and August 2009.

Comparison of semiconductor and equipment salesSource: The Information Network

According to the SIA, worldwide sales of semiconductors in August were $19.1 billion. Accordingly, the last time sales reached the $19 billion level was August 2005.

Quite a disconnect -– four years versus 15 years. Both the semiconductor and equipment industries prior to 2001 worked in tandem in a cyclical fashion of peaks and valleys every 2 years or so as shown below.

After 2001, the industry changed, and the semiconductor industry continued a relentless growth while the equipment industry has been relatively flat, save for the peaks and valleys reminiscent of the 90s.

There has been a flurry of positive news coming from the semiconductor equipment manufacturers of late:

* Lam Research (LRCX) reported its third-quarter profit nearly doubled.
* Mattson Technology (MTSN) noted revenues increased sequentially 38 percent over the second quarter of 2009.
* Brooks Automation (BRKS) expects revenue for Q4 to be up 45 percent from its third quarter.

Nevertheless, the semiconductor equipment market is still on shaky ground:

* Novellus Systems (NVLS)reported a sequential Q-t-Q drop of 29 percent.
* Cymer (CYMI) said that revenue in Q4 will be flat with Q3.
* ASML (ASML) reported that sales in the latest quarter fell to 590.7 million Euros from 696 million Euros in the prior-year quarter but rose from 277 million Euros in the second quarter.

Semiconductor manufacturers continue to underspend. Much of the problem in our opinion is the transition from 200mm to 300mm diameter wafers. A 300mm wafer can be used to make 2.25 times more chips than a 200mm wafer in the same amount of time on equipment that can cost only about 20 percent more than its predecessor.

In 2002, 38.2 percent of equipment purchased by the semiconductor manufacturers was for 300mm production, and 1.4 percent of silicon wafers processed were 300mm in diameter. In 2008, 92.1 percent of equipment purchased was for 300mm production and 37.4 percent of silicon wafers were 300mm.

As the percentage of 300mm wafers increases, the divergence in semiconductor equipment purchases compared to semiconductor sales will continue to increase. Semiconductor companies, let by International Sematech, are pushing for a transition to 450mm wafers, which in our opinion will be the death knell for a large number of equipment manufacturers. It is critical that semiconductor equipment manufacturers boycott 450mm development.

The good news is that our leading indicators, which forecast out four to six months, continue to point up for the equipment industry, as illustrated in the chart below. But based on our analyses, the “salad days” are over for the equipment industry.

Comparison of semiconductor equipment sales and proprietary leading indicatorsSource: The Information Network