Intel and the trickle-down effect

The chip king's warning of a Q4 slowdown was bad enough. But the bad news for chip equipment makers didn't stop there

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

The warning of slowing sales at the world's biggest chipmaker is bad news for Applied Materials, Novellus Systems and other companies that make semiconductor manufacturing equipment.

But there's more: Intel also said it is going to take delivery of an extra $500m in chipmaking equipment it hadn't expected to be able to get its hands on until next year.

That, analysts say, is a sign that other chipmakers are severely curtailing their spending on new chip equipment, and it means next year could be rough.

"The outlook for next year is relatively bleak," said Eric Chen, a chip equipment analyst at Chase Hambrecht & Quist. But Chen said it is 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 $500m 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 mid-year, 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."

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