Boom times continue for semiconductor equipment companies

A trade organization representing the industry said orders for February increased yet again, as the book-to-bill ratio rose to 1.41 from 1.39 in January. The ratio is the second highest ever, according to Semiconductor Equipment and Materials International (SEMI).

A book-to-bill of 1.41 means $141 in orders were received for semiconductor equipment for each $100 worth of products shipped. An increase in the ratio is viewed as a sign of strong demand for semiconductors. The imbalance typically means semiconductor companies are investing in equipment to expand or improve production. The book-to-bill ratio for December 1999 was just 1.19.

Often, a surge in semiconductor equipment sales will be followed by a jump in earnings for semiconductor manufacturers nine months later, various analysts have said.

Orders placed with manufacturers last month rose to $2.27 billion from $2.23 billion in January. In February of last year, orders amounted to $1.03 billion. Shipments for February, meanwhile, came to $1.6 billion, roughly level with January and December. Shipments for the month represent a 90 percent increase from the $845 million in shipments reported in Feb. 1999.

"Business is extremely strong and has apparently reached the capacity for the industry because shipment figures have not gone anywhere in the past few months," said Dick Greene, an analyst for SEMI. "Companies cannot ship as much as they'd like."

Despite the good news, the Philadelphia semiconductor index fell $12.94 to $1,190.51 today.

Chip manufacturing is a notoriously cyclical industry. Companies often have to lay off workers and shut down plants when mired in a slump. When business improves, these companies have to scramble to hire employees, buy equipment and reopen facilities to keep up with orders. The cycle affects both equipment makers, such as Applied Materials, as well as chip manufacturers, such as TSMC.

"If someone told them in the spring of 1999 that demand was going to be this strong, they would have made different business decisions," said Greene.

Greene said Asian-based chip companies are being particularly aggressive about expanding. Most companies typically invest 18 to 20 percent of semiconductor production revenue into capital expenditures. But some Asian companies are putting 45 percent of their revenue back into the business.

"They want a bigger share of the market, and when people want a larger share that tends to create some kind of upheaval at some point," said Greene. "But you can't tell those companies to stop producing so much because they have their own agendas."

The outlook for the industry looks favorable, but forecasting for the long term remains tricky. "Things look pretty safe for 2000, but as for 2001, no one can look that far ahead," said Greene.