Diversity of chip segments had tempered downturns but no more?

* The Current Downturn is more Broadly Based…
* Back to the “bad old days” of Lemmings off a cliff???
* Its not just a Foundry thing…
* All corners of the chip industry are impacted!!!

We were particularly struck by recent reports from Teradyne, FEI and Veeco. Three companies so far apart in the chip industry they might as well be on different planets.

Teradyne is a back end test company that has ZERO overlap with front end companies and could care less wether chips are made at 14nm or 90nm, wether they are FinFET, 3D or planar …or wether they are made from swiss cheese or silicon.

Veeco has long ago morphed into an LED tool company whose fortunes are driven by LED manufacturers in China. FEI has made a living blasting silicon wafers (and other things) with electron beams to discover their inner self. The only link is that Don Kania, CEO of FEI used to work at Veeco back in the dark ages.

So whats our point???

Our point is that the downturn that the semiconductor industry finds itself in today is more broad based and industry wide than any of the recent “soft patches” the industry has gone through which usually impact a limited subset of the companies or single companies, for instance, front end or back end, memory or foundry, process or process control…..

This implies that the origins of the downturn are more macro in nature and originate outside of the tech space. We are not just in a soft spot between 14nm and 10nm, in a “technology node transition”, as that would not impact back end test like Teradyne nor would it impact the LED business of Veeco.

Obvious too is the fact that the LED weakness in China this time around is not due primarily to an excess supply of capacity as what happened to first bring down Aixtron and Veeco a couple of years ago but rather a more deep seated , lack of demand.

Back end companies such as Teradyne tend to be more unit driven as technology platforms tend to last much longer than they do in the front end as they are end use application specific and not technology node specific to silicon geometry.

So long story short we have weakness in Foundry (TSMC), Logic (Intel), Memory (Samsung DRAM), LED (China), overall chip Units (Teradyne), 14nm to 10nm Node transitions (FEIC)……bottom line is that there is not a lot left that is strong or growing….most everything in the space is seeing increasingly negative numbers.

What we have then is not just a few random rodents meandering off course for unique company specific or product specific reasons but the broader semiconductor equipment industry has taken a cliff dive en masse.

Broader implies longer and deeper…
We recently spent time traveling and doing channel checks to find that most people in the industry have long ago written off the fourth quarter and don’t think we will see a recovery in the first quarter of 2016 and there is little visibility into the second quarter of 2016 but given the momentum of Q4 and Q1 it sounds a lot like Q2 2016 will not be great either so the general feeling seems to be that we are wishing for a recovery in the second half of 2016 which is so far off with such limited visibility that its anybody’s guess and by the time we get there everyone will forget who forecast what……We are back to the old analyst positioning of don’t worry about the downturn the recovery is just 6-9 months away, focus on that instead.

Stocks have had their bounce off the bottom…
As we had pointed out well over a month ago, when the stocks stop going down on bad news, its a pretty good bet that we are at or past the bottom. We continue to have a lot of bad news yet the stocks seem to be strangely resilient. We continue to have guidance below most current estimates. Though most companies are making their reduced guidance, future guidance and analyst numbers continue to fall.

Analysts and investors lost sight of the fact that Lam had a relatively poor forward guidance which was obviously totally lost in the announcement of the KLAC acquisition. Its somewhat funny that the company with the declining business (Lam) is buying the company with the increasing business (KLAC) …its usually its the other way around.

Feeding Frenzy helps stocks too…
Not to be ignored either is the piranha like feeding frenzy of M&A in the semiconductor space. Investors are more than willing to overlook falling numbers if there’s the slightest hint the company may be in play to be bought. While we would be the first to suggest that semiconductor companies have been undervalued for a very long time its also clear that their relative performance didn’t instill investor love. Even companies on the buy side seem to have benefited without a clear financial underpinning.

As an example, Lam research has seen its stock jump ten points despite paying a relatively high premium and valuation for KLAC coupled with their own forward numbers coming down sharply. Not many investors or analysts have also looked at the amount of debt the company will have after the deal is done. It will take a long time for Lam to both digest the acquisition and dig itself out of debt. One could argue that Lam’s stock price may have done better in the short term without the KLAC acquisition as it would have been unencumbered. We will see if the acquisition makes sense in the longer term as we think it will but it may take a few years to be proven correct. In the meantime, KLAC shareholders have had quite a nice payday……

The individual Companies:

Veeco
The simple summary is that LED orders have driven off a cliff without leaving any skid marks. The company looks like it is doing a long round trip back to being an ugly semiconductor equipment company rather than a sexy LED company and the valuation is slowly catching up to that reality. Management has desperately been trying to make up for falling revenues with acquisitions….that have been failing…and thus are likely doing more damage to credibility rather than fixing the revenue issue.

If we put a typical semiconductor equipment company multiple (cause thats what Veeco is now…) on Veeco’s falling forward numbers we get a number below their current stock price even after adjusting for the drop related to the just announced quarter.

FEIC
Although we love FEI as a company, their luck seems to have run out over the past year. Its hard even for FEI with all its non-semi business to be able to outrun such a sharp drop off in its core semi business…the non-semi business just can’t grow as fast. Just as the semi business has fallen off sharply, FEI has decided to “double down” and further increase its exposure to semiconductors by buying DCG.

Again, we like DCG a lot and the space it fits into, but its pretty far outside of FEI’s core market and DCG has a lot of relatively small products that it has rolled together smartly to get a bigger company but it has no singular home run, core product as is the case with FEI. DCG is more of a collection of smaller fault analysis products not all that synergistic to FEI’s core electron beam technology.

Teradyne
The summary of Teradyne appears to be “it coulda been worse….”. The company reported a beat in the current quarter and guided below consensus for the upcoming quarter but it seems that the results were not as bad as some had feared could have been and in fact some products were not that bad at all. It certainly makes lemonade out of the lemons of weak guidance going forward. The company tried very hard to steer analysts and investors away from focusing on the Q4 shortfall and successfully redirected them to hope for a better 2016 (though little hard evidence is there to support that conclusion just yet).

We are surprised by the amount of time and words spent on a relatively insignificant $16M robot business as compared to the more critical and core test business, obviously because robots are cool and sexy and growing while semi test is not as much fun. It was a surprisingly bullish call for a company that guided below consensus but we will have to wait and see if the enthusiasm is well founded or not, but so far we like to stock reaction…..

Robert Maire
Semiconductor Advisors LLC

Share this post via:

• 
• 
• 
•