Chip equipment makers feel Intel aftershocks

Companies such as Applied Materials and Novellus Systems are hit with a double dose of bad news when Intel warns that revenues will fall short for the fourth quarter.

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Gartner analysts James Hines and James Handy say the bad news from Intel and somber predictions for semiconductor manufacturing equipment vendors in 2001 simply represent adjustments to overblown expectations.

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equipment makers were hit with a double dose of bad news Thursday when Intel warned that revenues will fall short for the fourth quarter.

First off, slowing sales at the world's biggest chipmaker will inherently hurt Applied Materials, Novellus Systems and other companies that make semiconductor manufacturing equipment.

In addition, Intel said it is going to take delivery of an extra $500 million in chipmaking equipment that it hadn't expected to be able to get its hands on until next year. What that could mean is that other chipmakers curtailed prospective orders. In any event, by buying $500 million worth of equipment now, Intel will likely cut orders next year.

"The outlook for next year is relatively bleak," said Eric Chen, a chip equipment analyst at Chase Hambrecht & Quist. But Chen said it is still too early to tell for sure.

As chipmakers have seen demand drop, they have begun to rein in their spending on new equipment.

"I'm not sure they are necessarily seeing cancellations, but there is a significant deceleration" in new orders, said SG Cowen analyst Tia-Min Pang. In particular, there has been a slowdown in orders from Taiwan foundries, which had been spending vast sums to boost their chipmaking capacity.

The overall effect could be slightly delayed. Extra sales to Intel will boost end-of-year revenue for companies like Applied and the like, but next year's sales as a result could be disappointing.

As for Intel's spending, Pang doubts Intel will boost capital spending by the 20 percent or so needed to keep the industry growing. Rather, Pang speculated the extra money Intel is spending this year will come out of next year's budget.

"Whatever they had originally planned is probably now $500 million lighter," Pang said.

This is by no means the first sign of bad news for the chip equipment sector.

The first trouble spots began to appear around midyear, as orders slowed for the equipment used to test chips. In August, chip-assembly equipment maker Kulicke & Soffa Industries said it was seeing a delay of orders. More recently, orders have slowed for the gear that processes the actual chips.

The slowdown in orders is exacerbated by chip equipment makers beefing up their own production lines after several quarters of strong orders. Once struggling to keep up with months of backlog, chip gear makers may soon have to deal with too much manufacturing horsepower.

Though the most recent warnings from chipmakers are not the first sign of tough times for the chip gear sector, Pang said the latest pronouncement from Intel is significant.

"Intel has got a very good view on global conditions," Pang said. "For it to be saying that there is significant slowing worldwide, it really is confirmation of what we've been saying for a while."