Reduced Memory Spending to Hit Earnings of AMAT, KLAC, and LRCX



Semiconductor equipment suppliers

The semiconductor industry is going through a downturn, but many companies expect growth to resume in the second half of 2019. However, growth may not return that fast for SME (semiconductor manufacturing equipment) suppliers Applied Materials (AMAT), Lam Research (LRCX), and KLA Corporation (KLAC), as inventory stockpiles in the channel encourage chipmakers to reduce their capital spending.

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Chipmakers have to buy equipment and machinery in advance as it takes months and a large sum to build and install the equipment. Thus, chipmakers delay their orders to cut costs. Foundries like Intel and TSMC and memory chip makers like Micron (MU) and Samsung (SSNLF) buy equipment from SME suppliers. Thus, AMAT, LRCX, and KLAC’s earnings serve as a barometer to gauge the future growth of chip companies.

AMAT’s fiscal 2019 second-quarter outlook

For the fiscal 2019 second quarter, which ended in March 2019, AMAT expects revenue to fall 24% YoY to $3.48 billion as memory chip makers lower their capital spending to reduce industry supply. AMAT earns 45% of its revenue from memory. AMAT, which earns 13% of its revenue from the Display segment, will also see declines in the display segment as its customer Samsung Display expects demand from Apple to fall in the first quarter.

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LRCX’s and KLAC’s fiscal 2019 third-quarter outlook

For the fiscal 2019 third quarter, LRCX’s revenue is expected to fall 17% YoY to $2.4 billion because of its high exposure to the memory market. LRCX earns more than 80% of its revenue from memory. On the other hand, KLAC expects revenue to rise 5% YoY to $1.07 billion at the midpoint, as the quarter will include $150 million in revenue from Orbotech, which it acquired on February 25. Excluding Orbotech, KLAC’s revenue is expected to fall 10% YoY to $920 million.

All the three SME suppliers will likely encounter strong demand from the foundry market, as Intel and TSMC (TSM) transition to advanced nodes that use material-intensive EUV (extreme ultraviolet) lithography. The three SME suppliers are unlikely to report a strong outlook for the second half, as the memory market is expected to remain in a downturn for the next few quarters and growth in foundry and logic likely won’t be able to completely offset declines in memory.

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