Contradicting gloom and doom: reports of industry's demise greatly exaggerated - Statistical Data Included

Electronic News, August 26, 2002 by Jeff Chappell

Things may not be as bad as Wall Street would have the industry believe, even though investor and analyst jitters definitely have left the order outlook murky for equipment suppliers.

The latest quarterly earnings reports from the last of the large OEMs as well as Semiconductor Equipment and Materials International's (SEMI) July book-to-bill figures, seem to indicate a seasonal flattening in order growth rather than Wall Street's Armageddon.

SEMI reported last week that its July book-to-bill, a three-month rolling average of North American equipment suppliers, was 1.16, down from last month's 1.26 but well above financial analysts' predictions that the ratio would fall below 1. The book-to-bill ratio typically dips in the summer quarter, even during upturns.

Total equipment orders dropped 2 percent in July to $1.2 billion, while total shipments grew 7 percent to $995.3 million from last month's figure. Front-end orders were $962.4 million while shipments totaled $8163 million for a front-end ratio of 1.18. Backend equipment orders fell to $196.8 million, while shipments were $179 million for a ratio of 1.07.

The numbers caught Wall Street by surprise, following analyst reports that equipment orders had fallen off a cliff in July and were far beyond seasonal fluctuation.

"We had anticipated that orders would be down significantly as a strong month of April rolled off of the three-month average and the weak month of July rolled onto the average," said Goldman Sachs Group Inc. analysts James Covello and Amanda Hindlian in a research note.

"The rolling average ratio always makes it difficult to determine where any given one month's orders came in, but it's now apparent that the delta between the month of April and July was not as significant as we had originally thought. We feel quite confident that the month of July was quite weak for orders, so our best thought is that April was not as strong as we originally thought," the analysts wrote.

Covello and Hindlian suggested that August would be a weak month for orders and that the book-to-bill ratio would contract to 1 next month.

While the three-month rolling average of North American suppliers' book-to-bill ratio may have come in better than expected, VLSI Research Inc.'s international OEM data for July paints a much bleaker picture.

VLSI said the worldwide book-to-bill ratio fell to 0.77 on bookings of $1.9 billion and billings of $2.4 billion. VLSI also revised its June figure down from 1.24 to 1.15. Unlike SEMI's book-to-bill figures, VLSI's number reflects a single month of worldwide orders and shipments.

"The stock market crash has wiped out confidence throughout the supply chain up to the consumer. The crash has literally frozen order activity in July as companies held back investment plans," VLSI stated in its report. The research firm expects August orders to be flat.

Bright Spots Illuminate Earnings

While earnings weren't exactly stellar this past quarter, they didn't spell the end of the world, either.

Agilent Technologies Inc. last week reported a Q3 loss of 49 cents per share on net orders of $1.5 billion and revenue of $1.4 billion for the quarter that ended July 31. The company said its worse-than-expected results were the result of problems with the implementation of its new enterprise resource planning (ERP) system.

While net orders were down 9 percent sequentially, if the problems with the ERP system are taken into account, orders were sequentially flat after two consecutive quarters of growth, said CFO Adrian Dillon during the company's earnings conference call. In contrast to Wall Street's beliefs, order cancellations of $90 million were flat for the third consecutive quarter, he added.

Agilent's semiconductor test business saw its third quarter of sequential order growth, up 7 percent quarter-over-quarter, driven primarily by flash memory and parametric test, Dillon said. Its semiconductor division orders were essentially flat quarter-over-quarter once problems with Agilent's ERP system were factored in. Semiconductor-related revenue was up 5 percent in spite of the ERP problems.

For its fiscal Q4, Agilent expects revenue to be between $1.6 billion and $1.7 billion, including some Q3 revenue recognized in the current quarter because of the ERP system problems, said CEO Ned Barnholt.

Fellow test equipment supplier Credence Systems Corp. also reported Q3 earnings last week, with net sales of $47.7 million, a 23 percent sequential increase. The net loss for the quarter was 31 cents per share.

Credence CEO Graham Siddall said he expects at least two more quarters of a lackluster market.

North American Semi Equipment Book-to-Bill

(Shipment and billings figures are in millions of U.S. dollars)

Month                Billings  Bookings  Book-to-Bill

Feb. 2002               818.0     737.2      0.90
March 2002              797.6     835.9      1.05
April 2002              814.6     995.6      1.22
May 2002                869.6   1,105.2      1.27
June 2002 (Final)       927.1   1,171.3      1.20
July 2002 (Prelim.)     995.3   1,153.1      1.16

SOURCE: SEMI