Is the Sky Falling?

Analysts, Tool Makers Say No

One would have thought the sky was falling on the semiconductor industry last Thursday morning as technology stocks dropped, with semiconductor capital equipment shares leading the way.

Chicken Little must be an investor.

Alas, Electronic News (the print edition): we hardly knew ye!Assembly equipment company Kulicke and Soffa Industries Inc. (K&S) Wednesday evening announced that it experienced some customer order deferrals and pushouts for ball-bonder tools because of space constraints and wafer and substrate shortages affecting certain customers.

“We hope no one overreacts to this news,” said C. Scott Kulicke, the company’s chairman and chief executive officer.

But overreaction is exactly what happened according to analysts and other equipment manufacturers. The K&S announcement, coupled with reports that Motorola Inc. would reduce its projection of demand for wireless handsets, prompted already nervous investors to sell off technology stocks Thursday.

On Thursday as of noon EDT, the tech-heavy Nasdaq index had lost 22 points, or 0.61 percent, falling to 3,635 after dropping more than 3 percent earlier in the day. Even the consistent performers in the capital equipment industry weren’t immune; Applied Materials Inc. was down $3.56 and closed at $69 per share. The Nasdaq rebounded, however, to close at 3,750, up 101 points.

While many chip stocks, including chipmakers IBM and Intel, ended Thursday on positive notes, equipment stocks remained tepid. The Semiconductor Equipment and Materials International (SEMI) index of equipment companies ended the day down more than three points. Technology stocks in general seemed to be holding their gains on Friday-the Nasdaq was up more than 14 points as of 12:45 p.m. EDT. Equipment stocks, however, continued to be lukewarm; the SEMI index was down another 1.5 points.

No Cause for Alarm

Fat kid in a bunny suit -- that's me!
Well, now I can say it: they were WRONG!

Technology and financial analysts said investor reaction had to do with mixed signals in the marketplace, and not the analog/digital kind.

On one hand, there was the K&S announcement, the Motorola announcement, and recent reports from some companies that near-future earnings may not be as high as predicted. But this tends to be typical for second-quarter reports during the summer, even during an upswing. Furthermore, many companies are posting record earnings and aren’t experiencing the traditional summer slowdown. Also, the Semiconductor Industry Association (SIA) last Thursday reported that world semi sales had topped $16.6 billion in June, a 48 percent year-to-year increase over June 1999 and an all-time record.

“(The SIA) figures are through the roof, which indicates the industry is as good as it can get, and every time we say that, it gets better,” observed Risto Puhakka, vice president of VLSI Research Inc. He added that the stock price of chipmakers doesn’t seem to be getting stronger, however, and some have even declined recently. “We have a lot of mixed signals from the marketplace,” he said.

“The basic thing is that the industry is at full swing, and you see shortages here and there,” Puhakka said. As for sensitive investors and bouncing stock prices, everyone is trying to figure out where it’s going to peak and how soon, he added.

Several analysts noted that assembly equipment companies have much shorter lead-times on orders than front-end tool makers, and that they are the first to feel the effects of a downturn because the assembly industry closely tracks the chip industry in general. This may have been part of the reason investors reacted the way they did, said Dick Greene, principal equipment analyst with SEMI.

“I haven’t seen anything in our data that reflects any particular signs of a downturn,” Greene said.

S.G. Cowen Securities Corp. analysts concluded that the reasons behind K&S’s announcement were essentially the same reasons behind Teradyne Inc.’s previous announcement of lower than expected quarterly earnings, said Tia-min Pang, managing director and equipment analyst.

Pang said that K&S revealed in a conference call Thursday that a Taiwanese subcontractor was primarily responsible for the order push-out because of space constraints at its facilities. Looking to other customers to fill the vacant slots, K&S discovered that other subcontract accounts had tempered their outlook, taking a more conservative approach to near-term spending, Pang said. The company indicated that most of these customers are located outside of Taiwan and for most, the issue is a lack of finished wafers from their foundry fab partners, he added.

This was consistent with Teradyne’s announcement that customers in Korea and Singapore had eased spending because the number of available finished wafers was less than anticipated, according to S.G. Cowen. The firm concluded that Teradyne and K&S share a mutual customer, Amkor Technology, that contributed to both companies’ announcements. Amkor reported quarterly earnings Wednesday night. The packaging and test company said that its fab utilization rates were 75 percent, which could mean one of three things, according to Pang. Either Amkor experienced a lack of wafers to test and package during the quarter, lost market share to its Taiwanese competitors or Amkor and Teradyne’s specific market segment is experiencing softness, Pang said.

“In digging deeper, it appears to be customer-, (geography-) and chip-application-specific,” Pang concluded. “We’re not seeing it anywhere else, just these two companies.”

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

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