Samsung Sloppy Sailor Spending Spree!

Last week, TEL (which is the Japanese equivalent to AMAT & LRCX) reported a June quarter which saw revenues drop to 236B Yen from March’s 261B Yen and saw earnings drop from March’s 47B Yen to June’s 41B Yen, a respective 9.3% decrease and a 12.8% decrease in earnings.

We don’t think this is attributable to share loss and actually think there is little to no share loss in the numbers. There may be customer mix issues but the mix reported seems very similar to that just reported by Lam.

Meanwhile Samsung had fantastic results of semiconductor sales of 17.6T KW ( $1B=1.1T KW) up 15% Q/Q. Operating margin was up to 46% from the previous quarters 40%. Memory demand remains strong and pricing remains firm so Samsung is obviously confident enough to plow more money into capex for chip production.

Total capex was 12.7T KW and 7.5T was semis and 4.5T for displays. By comparison Q1 was 9.8T of which 5T was semis and 4.2 displays. This represents a whopping 30% sequential increase in capex Q/Q. This also means that H1 capex was 22.5T KW versus ALL of 2016 at 25.5T KW. Obviously 80% of spend goes to memory but logic is still getting support and may get more in the future given Samsung’s recent comment about wanting to triple its foundry business to compete with TSMC.

In effect we have “a tale of two cities”- TEL is already reporting a slowdown in capex spend but Samsung looks like it has no reason to slow down capex spend. We are clearly seeing a slowing of DRAM spend which we think is a good thing given the volatile nature of that segment. Obviously customer mix is going to change a bit so we may see differing effects on different equipment makers depending upon who their biggest customers are.

The slowdown at TEL does add another data point of a slow down or at least near term peak in the market.

TEL Top Tick???
The 9% drop in revenues and 13% drop in earnings should not be ignored given TEL’s stature in the business. There is strong correlation to what we heard from Lam last night as TEL saw its NAND business increase from 27% of sales to 40% while DRAM dropped from 22% to 17%. Even more surprising was foundry dropping from 27% of business to 16% while logic (mainly Intel) was flattish at 27%. In summary, DRAM and foundry declined in Taiwan (obviously TSMC) while NAND continued to rocket in Korea (obviously Samsung).

TEL said it will increase share in dep, etch and clean in 2017 (AMAT has made similar claims and Lam has been more silent so we assume some share loss). TEL is doubling etch tool capacity by 2019. TEL’s view is for NAND market to be up 30% Y/Y , DRAM up 5%-10% and foundry/logic flattish. They feel that 2017 WFE capex will be up 10% primarily driven by 3D NAND and logic.

To early to tell- Pause, peak or plateau…
Its unclear how long the dip will last, whether its one quarter as suggested by Lam or potentially longer as TEL already reported a drop in June numbers. TELs 10% drop already reported seems larger than what Lam is implying for September shipments. Our best guess is that Lam is faring better due to higher exposure to Samsung whose spending will offset other declines.

Further triangulation from KLAC…
We will get our third data point from KLAC but as before we would err on the side of caution and not get too far ahead in our expectations. While TEL, AMAT and LRCX are in similar boats, KLAC and ASML tend to be earlier in the cycle with longer lead times and thus do not correlate as well as LRCX, AMAT and TEL do. We would suggest that TEL’s results are likely most predictive of AMAT’s performance. Given AMAT’s exposure to TSMC we might expect a similar issue in foundry.

AMAT while well exposed to Samsung is not as highly correlated to Samsung as Lam. We do think there is some share loss in low end etch from Lam to AMAT with TEL’s share being a bit more stable. We don’t see share loss from KLAC to AMAT in a significant way as PDC has been less effective than AMAT’s etch.

Samsung spending like there’s no tomorrow…
(maybe there is no tomorrow if Kim Jun Un launches)
Samsung is on a huge roll. The semiconductor division is going great and memory remains huuuuge (obviously there is a very good derivative call on the shares of Micron here…). We think 3D NAND has a long run but DRAM may slow and we may be seeing some potential signs of it already in both Lam and TEL. Samsung also knows where its bread is buttered as consumer electronics was 18% of sales but only 2% of profits. So its clear that Samsung will continue to feed the semiconductor business which is the clear earner. This is obviously not lost on Samsung’s long term plans as it is clearly envious of TSMC and the great job they have done in foundry. We think its going to be very, very hard for Samsung to make progress in foundry but we think they will be very dominant in memory for a long time as they currently already are and may become even more dominant if Toshiba pauses here.

The stocks…
We think we were correct about being light the shares of LRCX going into their quarterly report. We would take the same approach with KLAC as we think the stock has had a great run and could be a bit “toppy” with “twitchy” investors.

The TEL news makes us even more nervous and cautious than before. While fundamentals remain solid there is clearly some near term uncertainty as spending between chip makers varies it remains hard for equipment companies to make up for slowing spending coming out of TSMC. The best scenario would be for Intel to spend more to make up for TSMC’s slowing but we are not that sure of that being the case.