Friday, May 20, 2011

What Q1 Says About Semiconductor Capital Spending

With downgrades gripping the semiconductor equipment sector I thought I would share a bit of history about capital spending budgets. Again, I'm going to present some observations from the guru over at IC Insights, Bill McClean.

In this table we see how reliable Q1 announcements are in predicting the total amount and direction of capital spent for the year:

The amount of capital spending announced in Q1 seems to always set the direction for the year. The chart also shows that these Q1 numbers always under-estimate the final tally (up or down).

I believe herd psychology plays a big role in this. A few folks have described the cycles like this: "You tell me things are getting better (or worse). I tell someone else. They tell someone else. They tell someone else. Before you know it, things get better (or worse)." There's certainly more to it than just word-of-mouth. The march along Moore's Law is, obviously, the primary driver.

Could this year be different? Maybe. The Japan disaster is wreaking havoc in many areas of the semiconductor supply chain. There's also some concern regarding final demand. Companies are openly talking about these items. Novellus Systems cited order pushouts during their April 27 earnings call. The company expects bookings to decline 10% to 25% in Q2. Lam Research guided their revenues to $745 million (+ or - $20 million), down from $813 million, on April 20.

In addition to the problems in Japan, you have the seasonal patterns that grip the sector every year. Q2 is typically one of the weakest of the year for the capital equipment companies. Bookings have traditionally peaked late in Q1, or early in Q2, and then bottom sometime in Q3. Semiconductor companies tend to get pretty aggressive with orders at the end of each year - busting the budget is one way to describe it.

Next week investors get to hear the story from Applied Materials - the gorilla of the industry. A weaker than expected view from Applied would certainly set the stage for a year that ends up outside of the historical pattern. It would also serve to validate those expressing bearish views.

Of course, quarterly perturbations are what they are…. Just noise…. Which reminds me, I need to make a post describing the bull case.

Don't touch that dial!

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