November 24, 2007

Half Full /Half Empty, Volume 2, SEMI

(c) copyright View from Silicon Valley, 2007.  All rights reserved.



Washington insists the US economy is strong.  Wall Street assures us "all is well."  In true California style, Sacramento insists there is no problem which cannot be overcome with a positive attitude (and maybe another bond issue).

You can get news and insight on falling house prices, tight credit conditions, burgeoning inflation, falling national employment and/or any of a half-dozen areas of concern anywhere, so we're not going to bother you with our opinion.

However, there are several Silicon Valley-specific statistics we believe need highlighting.  How your situation is personally affected by them, probably dictates your opinion of the Silicon Valley economy.

Next up is the Semiconductor  Equipment and Materials International's (SEMI's) monthly report on equipment sales.  In short, SEMI manufactures the equipment used to manufacture semiconductor chips.  The last three years of SEMI data is updated monthly at: http://www.viewfromsiliconvalley.com/id52.html

MSM tends to parrot whatever SEMI says in their monthly press release.   SEMI's most recent press release started out,

"North American-based manufacturers of semiconductor equipment posted $1.23 billion in orders in October 2007 (three-month average basis) and and a book-to-bill ratio of 0.83 according to the October 2007 Book-to-Bill Report published today by SEMI. A book-to-bill of 0.83 means that $83 worth of orders were received for every $100 of product billed for the month."

Breaking that statement down into two pieces, October, 2007's $1.23B in new bookings is only -$3M (or -.003B) or less than -1% from September but down -16% from October, 2006.

Similar the last missive, the last five years' SEMI bookings were:

2003   $9.654B
2004  $17.075B
2005  $12.395B
2006  $18,405B
2007  $17.230B* (*= run-rate)

Measuring from 2005, sales are up +39% in two years.  Going back to 2003, bookings are up +78% in four years.

Those same four years for SEMI billings are:

2003   $9.932B
2004  $16.319B
2005  $14.237B
2006  $17.912B
2007  $18.930B* (*= run-rate)

Again, sales are up +33% in two years.  Since 2003, billings are up +91%.

Surely this is at least half full, right?

What's not to like?  Given 30-odd-percent growth in two years and 78%+ in four years, how could you not make money investing in these companies?

Well, there might be a couple of thorns on that rose.  Most obvious is the book-to-bill ratio in the second half of that opening sentence. 

SEMI's book-to-bill ratio is widely considered a barometer of the health of the SEMI business.  When bookings exceed billings (the ratio is greater than 1.00) SEMI builds up their order backlog, and this is widely regarded as a sign of future strength.

In fairness to SEMI, they always report B:B in their monthly press releases.  We'll overlook, for the moment, our personal experience that ~90% of the press releases' "preliminary" bookings and billings figures, over the ~four years we've kept track, were quietly revised downward the following month (or even later).  Almost every revision seemed to also lower the B:B ratio, but that's a missive for when the freakonomics urge hits.

The same years' SEMI B:B was:

2003  0.972
2004  1.046
2005  0.871
2006  1.028
2007  0.910* (*= run-rate)

As you can see on our monthly chart (http://www.viewfromsiliconvalley.com/id52.html), within 2007, the B:B started out at 0.998, fell to 0.983 by April, then 0.844 by July leading up to October's "preliminary 0.828.  (Nearly every month's "preliminary" figure was lower by the it reached "final" status.)

B:B is "negative" (i.e., less than 1.000) for all ten months(!) in 2007, making 14 months out the last 15.  Counting five negatives in 2006, twelve(!) in 2005 and the last four months of 2004, you find 31 negative months in the last 38.

Going further back, B:B was negative all 12 months(!) of 2003 and the last four months of 2002.  That's 47 negative months out of the last 62.

Measured another way, the last five years' backlog gain or loss was:

2003   -$.278B
2004   +$.756B
2005  -$1.842B
2006   +$.493B
2007  -$1.700B* (*= run-rate)

Despite top-line sales growth of +78% bookings and +91% billings, SEMI's backlog has shrunk by an aggregate -$2.571B.  (Both 2002 and, of course, 2001 were also negative.)