Chip Recovery: It's For Real — Equipment orders confirm rebound

Electronic News, May 24, 1999 by Jeff Dorsch

Austin-Growing orders for semiconductor capital equipment seem to confirm a long-rumored turnaround in the overall semiconductor market.

Reports last week by Applied Materials Inc. and Semiconductor Equipment & Materials International (SEMI) indicated that capital equipment orders are accelerating, although business generally remains at levels lower than a year ago.

Applied Materials reported booking a record $1.39 billion in orders for its second fiscal quarter ending May 2, with Taiwan accounting for 25 percent of those orders, second only to North America's 30 percent.

The April book-to-bill ratio for North American equipment vendors came in at 1.28, down slightly from March's revised figure of 1.33, as shipments were up 10 percent from the previous month and bookings rose 6 percent compared with March.

Taiwanese chipmakers-espec-ially the silicon foundries-are helping lead the charge. Taiwan Semiconductor Manufacturing Co. (TSMC), the worlds biggest foundry, is increasing its capital spending budget for 1999 by 36 percent, to $1.13 billion from $830 million, in light of demand from North American customers. Earlier this year, Motorola Inc. agreed to shift some of its semiconductor manufacturing to TSMC.

TSMC had even more hope last week for equipment vendors, who have spent years and millions of dollars adapting their products for 300mm wafer processing, only to see the semiconductor industry lose interest in the 300mm transition and worldwide plans for 300mm fabs dwindle to a handful of relatively modest pilot lines.

F.C. Tseng, president of TSMC, said in San Jose last week that his company and an affiliate, Vanguard International Semiconductor Corp., may begin construction as early as next year on a $2.1 billion 300mm fab in Taiwan. The facility may begin volume production in 2002, and would be capable of fabricating 0.13-micron device features.

Credence Systems Corp. of Fremont, Calif., a supplier of automatic test equipment, last week reported second-quarter sales for the period ending April 30 were $38.1 million, up 44 percent from the first quarter's top-line figure of $26.5 million. Compared with the second quarter of fiscal 1998, however, sales were down 49 percent, from last year's $74.7 million.

There wasn't good news everywhere in semiconductor equipment and materials. Etec Systems Inc. of Hayward, Calif., last week reported that sales in its third fiscal quarter ended April 30 declined by 18 percent compared with a year ago, to $57.2 million from $70 million.

"Revenues were impacted by lower unit demand for mask pattern generation systems, which has been affected by limited capital investments for mask-making equipment in Japan and overcapacity in Taiwan, as well as continued consolidation among maskmakers," Etec stated. "Additionally, mask pricing pressures in Europe have impacted demand in that region."

Etec laid off about 100 employees during the quarter and consolidated its European facilities to cut costs. It said it expected to show a net loss in its fourth quarter, as it did in the third quarter, and it may have a loss in the first quarter of fiscal 2000. Investors responded to the news last Thursday by sending the company's stock down 15.6 percent, off 5-5/8 to 30-3/8.

Photronics Inc. of Jupiter, Fla., an independent photomask manufacturer and one of Etec's biggest customers, reported that sales in its second quarter ended May 2 were down 12 percent compared with the like period of a year ago, to $53.8 million from $61.3 million. Sales were up 12 percent on a sequential basis, however.

The big news of the week was the quarterly report from Applied Materials. The Santa Clara, Calif., company is the world's largest supplier of capital equipment, and it serves as a bellwether of the equipment business.

Applied reported second-quarter net sales were $1.12 billion, down 5 percent from the year-ago period's $1.18 billion but up an eye-popping 51 percent from the first quarter's $742 million. Orders leaped 35 percent from the first quarter, to $1.39 billion from $1.03 billion, and backlog at the end of the second quarter was up 18 percent from the end of the first quarter, to $1.36 billion to $1.15 billion.

Even more impressively, Applied made a healthy profit in the face of accelerating business, which can be hard for some equipment vendors, as they scramble to handle increased levels of activity. Net income in the second quarter was $141.6 million or $0.36 per diluted share, approximately the same as the $141.2 million or $0.37 a share in net income for the second quarter of fiscal 1998. The period's net leaped up from $42.5 million or $0.11 per diluted share in the company's first quarter.

While North America and Taiwan represented over half of Applied's orders in the period, Japan accounted for 17 percent, Europe 14 percent, South Korea 8 percent and Southeast Asia/China 6 percent. Earlier in this decade, South Korea was usually second to North America in the geographical breakout of Applied's orders, but the Asian financial crisis of 1997 has had a chastening effect on the leading Korean chipmakers.