Clinging to Q4 hopes: Q3 hits industry hard, squelching gains made earlier in the year - Industry Overview

Electronic News, Oct 21, 2002 by Jeff Chappell

It looks like the gloom and doom preached by Wall Street since last spring finally came true last quarter for the semiconductor industry, even as the market clings to a few rays of hope.

Semiconductor Equipment and Materials International's (SEMI) latest book-to-bill numbers for North American OEMs reflect a crash in equipment orders at the end of the summer, adding insult to Q3's injuries.

SEMI's book-to-bill figure is a three-month rolling average of the ratio of orders to shipments. That number fell to 0.84 late last week, the first time it has dipped below 1 since last February. The three-month average of worldwide bookings in September was $823 million, 19 percent below the August level of $1.02 billion. Worldwide billings were $985 million in September, 1 percent below the revised August figure.

This drop-off in bookings was reflected in the latest quarterly earnings reports from equipment suppliers in both the front- and backend. Novellus Systems Corp., the largest OEM to report so far, characterized Q3 as disappointing in light of order growth earlier in the year.

But unlike some of its smaller brethren that got spanked hard in this most recent quarter, Novellus actually saw a slight increase quarter-over-quarter in revenue. The copper market share leader posted earnings per share of 11 cents and revenue of $230.5 million, an increase of 3.8 percent sequentially, while net orders dropped 26 percent sequentially to $202 million. CEO Rick Hill predicted during the company's quarterly earnings conference call that Q4 orders would be flat at around $200 million, but that figure could be lower by as much as 10 percent.

Novellus predicted Q4 revenue of $211 million and shipments of $185 million, with earnings of 11 cents per share.

"These are not easy numbers to make, but there are glimmers of hope beginning to surface in the industry," Hill said. "I think what we see is an industry that is coming to grips with a lack of available of cash."

Those chipmakers that have a strong cash position are starting to spend on advanced technology in order to take advantage of their competition that does not. "They are beginning to invest, and what we are hoping is that this will mitigate further downside in the business," Hill added.

Meanwhile even though automated test giant Teradyne Inc. reported a loss per share of 27 cents for Q3 and doesn't forecast reaching a breakeven point based on current business levels until the middle of next year, there were a few of those positive glimmers evident as well.

Teradyne's Q3 orders were $231 million, a tiny improvement over the previous quarter's mark of $228 million. Q4 orders will be somewhat better than flat quarter-over-quarter, predicted Teradyne Chairman and CEO George Chamillard during a quarterly call with analysts. Capacity among Teradyne's installed base of chip testers remains tight, he said.

"We don't forecast bookings. On the other hand ... we're not seeing anything that says there is a tremendous runaway of new orders," Chamillard said. "Nor do I see any evidence of significant disasters."

Farther up the supply chain, even as bellwether Intel Corp. cut its capital expenditures and rival Advanced Micro Devices Inc.'s (AMD) loss came in worse than expected, chipmakers were cautiously hopeful last week about Q4. Intel forecast revenues to be flat to up 6 percent in Q4, while AMD forecast revenues to be up 20 percent with overall industry unit volumes to be up 8 percent to 12 percent. Meanwhile, IBM sparked a stock market rally when it surprised everyone with better-than-expected Q3 revenues, and it expects revenues to be up sequentially in Q4.

But not everyone shares in Intel's optimism about Q4 and a seasonal upturn, or even an improvement in 2003. Business at contract manufacturer Celestica Inc. hit a snag at the end of September and hasn't improved since then.

"We had four consecutive quarters of relatively stable revenue flow, but then there was additional weakness in Q3, particularly at the end of the quarter," said Anthony P. Puppi, executive VP, CFO and general manager for global services.

The current Q4 picture does not look better, Puppi indicated. "We don't see the fourth-quarter seasonal upturn," he said. "End-markets show weakness and visibility is difficult."

Cadence Design Systems Inc., the world's largest EDA company, said last week that it was not holding out hope for an upturn in 2003, much less Q4, after it saw revenue drop significantly in Q3.

Bernie Levine, Gale Morrison and Ed Sperling contributed to this report.